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 14 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?