New Project Evaluation Assignment | Homework For You

1. You will decide on a new project with a 5-year life and following data;

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• You expect sales as \$10,000 in the first year of operation but the sales in subsequent years are uncertain. Estimated sales growth is assumed to be normally distributed with a mean of 3% and a standard deviation of 2%. Costs of goods Sold (COGS) each year are uncertain as well but are assumed to be a percentage of sales. COGS as a percentage of sales is assumed to be distributed normally with a mean of 40% and a standard deviation of 6%.

• Fixed costs will be \$3,300 per year.

• The project will require an initial investment in net working capital of \$400. Beginning at year 1, NWC is 10% of sales. The entire NWC investment (across all years) will be recovered at the end of the project.

• To operate the project, a new piece of equipment must be purchased at a cost of \$10,000. The equipment will be depreciated using straight line depreciation.

• The equipment will have 0 salvage value by the end of the project.

• The cost of capital facing the firm is 10%.

• Tax rate is 25% Mean Std Dev Sales Growth 3% 2% COGS/Sales 40% 6% Fixed Cost \$3,300 NWC as % of Sales 10% Tax Rate 25% Cost of Capital 10%

Tasks: a) Calculate the NPV of the project while capturing the uncertainty in sales and costs of goods sold.

b) Simulate the NPV 1000 times using a data table.

c) Calculate mean, standard deviation, min and max values for projected NPVs

d) Calculate the probability of positive NPV

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