Answer:
Denver Mart
The net present value of this project given the sales forecasts is:
= $98,400.40
Explanation:
a) Data and Calculations:
Project's estimated life = 5 years
Initial project cost = $136,000
Discount rate = 11%
Initial estimated sales = 2,200 at $26
Revenue in years 1, 2, and 3 each = 2,200 * $26 = $57,200
Sales forecast of Year 4 and 5 revised to 1,750 units
Probability of 1,000 * 50% = 500
Probability of 2,500 * 50% 1,250
Total sales forecast = 1,750 units
Revenue in years 4 and 5 each = 1,750 * $26 = $45,500
Present value of revenue:
Year 1, 2, and 3 = $57,200 * Annuity factor
= $57,200 * 3.102 = $177,434.40
Year 4, PV = $45,500 * 0.659 = $29,984.50
Year 5, PV = $45,500 * 0.593 = $26,9815
Year 1 to 5 added = $234,400.40
Present value of revenue = $234,400.40
Present value of costs = 136,000.00
Net present value = $98,400.40
