Peabody Corporation has the following base-case estimates for its new small engine assembly project:• Price per unit= $500• Variable costs = $120 per unit• Fixed costs = $2.5 million• Demand = 20,000 units per year• Capital investment = $8 million at year 0• Product life = 8 years• Salvage value = $500,000• Depreciation method = seven-year MACRS• Tax rate= 35%• MARR = l2%Suppose the company believes that all of its estimates (except the product life, depreciation method, tax rate, and MARR) are accurate only to within ±20%.(a) What is the NPW of the project based on its base-case scenario?(b) What is the NPW of the project based on its best-case scenario?(c) What is the worst-case scenario?(d) What conclusion would you make aboul the project after seeing the scenario analyses?
Peabody Corporation has the following base-case estimates for its new small engine assembly project:
• Price per unit= $500
• Variable costs = $120 per unit
• Fixed costs = $2.5 million
• Demand = 20,000 units per year
• Capital investment = $8 million at year 0
• Product life = 8 years
• Salvage value = $500,000
•
• Tax rate= 35%
• MARR = l2%
Suppose the company believes that all of its estimates (except the product life, depreciation method, tax rate, and MARR) are accurate only to within ±20%.
(a) What is the NPW of the project based on its base-case scenario?
(b) What is the NPW of the project based on its best-case scenario?
(c) What is the worst-case scenario?
(d) What conclusion would you make aboul the project after seeing the scenario analyses?
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