Peabody Corporation has the following base-case estimates for its new smallengine assembly project:• Price per un it= $500• Variable costs = $120 per unit• Fixed costs = $2.5 million• Demand = 20,000 units per year• Capital investment = $8 million a1 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 rale, and MARR) are accurate only 10 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 about the project after seeing the scenario analyses?

Peabody Corporation has the following base-case estimates for its new smallengine assembly project:• Price per un it= $500• Variable costs = $120 per unit• Fixed costs = $2.5 million• Demand = 20,000 units per year• Capital investment = $8 million a1 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 rale, and MARR) are accurate only 10 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 about the project after seeing the scenario analyses?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 2E

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