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Project NPV Scenario Analysis

Scenario Analysis. The most likely outcomes for a particular project are estimated as follows :

Unit price: $50
Variable cost: $30
Fixed cost: $300,000
Expected sales: 30,000 units per year

However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10 percent higher or 10 percent lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 35 percent and the required rate of return is 12 percent. What is project NPV in the "best-case scenario," that is, assuming all variables take on the best possible value? What about the worst-case scenario?

Solution Preview

See the attached file (Excel file). The solution pasted here is not complete. You can see the formulas in cell in excel file.

First of all make the Normal Projections
Year Initial Investment Sales Revenue Variable Cost Fixed Cost Depreciation Taxable Income Tax Net Cash Flow ...

Solution Summary

The solution examines project NPV scenario analysis.