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Consider a project to sell every year 250.000 units of a vaccine.
You will need an investment of 5.000.000€ to get the project started; the project will last for five years.
The annual fixed cost will be 100.000€ the variable costs are 30€ per unit.
The depreciation of the asset will be done straight line with a final salvage value of 25.000€
The sales price is 40€ per unit.
The company will need an initial Working capital of 200.000€.
The tax rate is 15%, and the required rate of return is 20%.
What is the estimated OCF for this project? The NPV? Should you pursue this project?
You still have some doubts regarding the validity of the estimations:
Initial cost uncertainty +- 10%, Salvage value uncertainty +-15%, price uncertainty +-5%, Net Working Capital +-12%
What is your worst-case scenario for this project? Your best-case scenario? Would you go ahead with the project? What is the sensitivity of the project OCF and NPV to changes in the quantity sold? Let´s assume that the units are reduced to a level of 212.500.
Is there some minimum level of output below which you wouldn't want to operate? Why?
Sagot :
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