A project under consideration costs $100,000, has a fiveyear life, and has no salvage value. Depreciation is straightline to zero. The required return is 10 percent, and the tax rate is 30 percent. The weights for the Net Present Values are: 50% for base case; 30% for the Upper Bound and 20% for the Lower Bound
In addition, we have compiled the following information:
Bound 
Base Case 
Lower Bound 
Upper 
Unit sales 
500 
450 
550 
Price per unit 
$80 
$75 
$85 
Variable costs per unit 
$60 
$55 
$65 
Fixed costs per year 
$25,000 
$20,000 
$30,000 
(a) Find the Free Cash Flows for the Three Variations detailed above using the following Template
Base Case 
Lower Bound 
Upper Bound 

Sales 
$_____ 

Variable costs 
______ 

Fixed costs 
______ 

Depreciation 
_______ 

EBIT 
________ 

Taxes (34%) 
________ 

Net income 
$ ______ 
(b) What is the Free cash flows (also called the operating cash flows (OCF) for each of the scenarios
I. Base Case: _______
II. Lower: ________
III. Upper: ________
(c) Find the Net Present Value for each scenario
IV. Base Case: ______
V. Lower: ______
VI. Upper: _______
(d ) The Weighted average Net Present Value for the investment is $______
2. Most of the time we are actually unable to observe the relevant market value because we are doing a projection. Thus, since we are using estimates then the question becomes:
a. None of the above
b. are our estimates using assumptions?
c. The base case is most important as that is our most realistic simulation?
d. are our estimates at least close to the true values?
3. An equipment costing $50,000 is depreciated on a straightline depreciation charge over a 5year period. What will be the income amount shielded away per year from taxes assuming a marginal tax rate of 35%?
a. $10,000
b. $650
c. $350
d. None of the above
4. Assuming the following NPV and the accompanying weights, What will be the NPV expectation in dollar terms when we assume the following:
NPV Base Case $10,000 with a probability of 30%
NPV Lower Bound $5,000 with a probability of 50%
NPV Upper Bound 15,000 with a probability of 20%
Then the Weighted, meaning the expected net present value (NPV) will be
a. $5,000
b. $3,500
c. $7,500
d. Other $ ______
5. An analysis of the change in a project’s NPV when a single variable is changed is called _____ analysis.
a. forecasting
b. Simulation
c. sensitivity
d. scenario
6. If the Net Present Value (NPV) is greater than zero, then the payback period of the project using the discounted cash flow (DCF) method must be:
a. equal to zero
b. less than the “useful life” of the project
c. greater than the useful life of the project
d. equal to the useful life of the project