You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 6 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 13 percent and the company has a 21 percent tax rate. Pessimistic Expected Optimistic Market size 116,000 126,000 138,000 Market share 19% 23% 25% Selling price$166 $171 $175 Variable costs per unit$109 $105 $102 Fixed costs per year$981,000 $926,000 $896,000 Initial investment$1,986,000 $1,836,000 $1,816,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Number of rackets sold Pessimistic Expected Optimistic Market size 116,000 126,000 138,000…

Answered: You are the financial analyst for a…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 6 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 13 percent and the company has a 21 percent tax rate.

	Pessimistic		Expected	Optimistic
Market size		116,000			126,000			138,000
Market share		19	%		23	%		25	%
Selling price	$	166		$	171		$	175
Variable costs per unit	$	109		$	105		$	102
Fixed costs per year	$	981,000		$	926,000		$	896,000
Initial investment	$	1,986,000		$	1,836,000		$	1,816,000

Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

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