fm12 11 - a 0 = 3 2 1 IRR 1 000 510 \$ IRR 1 000 780 \$ IRR 1...

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(2) a. Estimate unit sales. The 16 indicates sales of 100 units. b. Estimate the sales price. The 58 indicates a sales price of \$13,500. c. Estimate the cost per unit. The 1 indicates a cost of \$5,000. d. Now estimate the after-tax cash flow for Year 1. It is [100(\$13,500) - 100(\$5,000)](1 - 0.4) = \$510,000 = CF 1 . (3) Repeat the process for Year 2. Sales will be 200 with a random number of 79; the price will be \$13,500 with a random number of 83; and the cost will be \$7,000 with a random number of 86: [200(\$13,500) - 200(\$7,000)](0.6) = \$780,000 = CF 2 . (4) Repeat the process for Year 3. Sales will be 100 units with a random number of 19; the price will be \$13,500 with a random number of 62; and the cost will be \$5,000 with a random number of 6: [100(\$13,500) - 100(\$5,000)](0.6) = \$510,000 = CF 3 . (5)
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Unformatted text preview: a. 0 = 3 2 1 ) IRR 1 ( 000 , 510 \$ ) IRR 1 ( 000 , 780 \$ ) IRR 1 ( 000 , 510 \$ + + + + +- \$4,000,000 IRR = -31.55%. Alternatively, with a financial calculator, input the following: CF = -4000000, CF 1 = 510000, CF 2 = 780000, CF 3 = 510000, and solve for IRR = -31.55%. b. NPV = 3 2 1 ) 15 . 1 ( 000 , 510 \$ ) 15 . 1 ( 000 , 780 \$ ) 15 . 1 ( 000 , 510 \$ + +- \$4,000,000. With a financial calculator, input the following: CF = -4000000, CF 1 = 510000, CF 2 = 780000, CF 3 = 510000, and I = 15 to solve for NPV = -\$2,631,396.40. The results of this run are very bad because the project’s life is so short. Had the life turned out (by chance) to be 13 years, the longest possible life, the IRR would have been about 25%, and the NPV would have been about \$1 million. Answers and Solutions: 12 - 11...
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