1 Downside scenarios Consider a proposal to produce and market a new tennis racquet. The most likely outcome scenario for the project incl. Expected sales of 30,000 units per year, Unit price of $200,...

1 Downside scenarios

Consider a proposal to produce and market a new tennis racquet. The most likely outcome scenario for the project incl. Expected sales of 30,000 units per year, Unit price of $200, Variable cost per racquet of $120, Fixed cost of $1,200,000. The project will last for 10 years and requires an initial investment of $4 million, which will be depreciated straight-line over the project life to a fnal value of zero. The firm´s tax rate is 30%, and the required rate of return is 12%.

1. What is the project NPV?

However, you recognize that some of these estimates are subject to error. Sales could fall 20% below expectations for the life of the project and, if that happens, the unit price would probably be only $150. The good news is that Öxed costs could be as low as $800,000, and total Variable costs1 would decline in proportion to sales.

2. What is NPV in the worst-case scenario?
3. How else could you consider the downside scenario in your NPV calculation? (Answer qualitatively.)