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c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Hint: Use Scenario Manager. Go to the Data menu, choose What-If-Analysis, then choose Scenario Manager. After you create the scenarios, you can pick a scenario and type in the resulting NPV (but be sure to return the scenario to the base-case afterward). Or you can create a Scenario Summary and use a cell reference to the Scenario Summary worksheet to show the NPV for each scenario.)
Unit Sales Sales Price per Unit Variable Costs per Unit Scenario Probability NPV
Best Case 25% 1,200 $28.80 $14.40
Base Case 50% 1,000 $24.00 $18.00
Worst Case 25% 800 $19.20 $21.60
Expected NPV =
Standard Deviation =
Coefficient of Variation = Std Dev / Expected NPV =
d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback.
CV range of firm's average-risk project: 0.8 to 1.2
Low-risk WACC = 8%
WACC = 10%
High-risk WACC = 13%
Risk-adjusted WACC =
Risk-adjusted NPV =
IRR =
Payback =
e. On the basis of information in the problem, would you recommend that the project be accepted?