# You are required to complete the tasks that follow. To do so, you must use a spreadsheet for all required computations. Set up the spreadsheet to compute the project’s NPV and IRR using the functions built into the spreadsheet. You should enter numbers only in a few cells in the top rows, because you will be required to change “unit sales” and the “required rate of return” later in the assignment. As a result, you should set up the spreadsheet so when these values are changed, all the computations are automatically performed. To do so, when setting up the computations

The expected cash flows for a capital budgeting project are given in the following table (all amounts are in thousands, except the IRR). The company’s required rate of return is 12 percent. ( SEE ATTACHED TABLE) You are required to complete the tasks that follow. To do so, you must use a spreadsheet for all required computations. Set up the spreadsheet to compute the project’s NPV and IRR using the functions built into the spreadsheet. You should enter numbers only in a few cells in the top rows, because you will be required to change “unit sales” and the “required rate of return” later in the assignment. As a result, you should set up the spreadsheet so when these values are changed, all the computations are automatically performed. To do so, when setting up the computations, as much as you can, refer to cell locations rather than entering specific numbers. If your spreadsheet is set up correctly, all your computations should be performed automatically when you change the values for “unit sales” and for the “required rate of return”; that is, you should not have to change any numbers in other cells to complete the computations. You are required to submit one spreadsheet that shows (1) the computations, regardless of whether you used spreadsheet functions or you set up your own equations/relationships and (2) the results of the computations. Be careful when using the NPV function built into the spreadsheet. Make sure you read the description of what computation the NPV function performs. In Excel, the NPV function does not compute NPV the same as we computed in class; rather, the NPV function computes the present value of only the futurecash flows (both positive and negative), which means one additional computation is needed to determine the correct NPV; that is, the initial investment outlay is not included in the spreadsheet computation. Assume you are confident about the estimates of all the variables that affect the project’s cash flows except unit sales. If product acceptance is poor, sales would be only 65,000 units per year, whereas a strong consumer response would produce annual sales of 100,000 units. In either case, operating costs (excluding depreciation) would still amount to 60 percent of revenues. You believe there is a 20 percent chance of poor acceptance, a 30 percent chance of excellent acceptance, and a 50 percent chance of average acceptance (the base case given in the table above). What is the worst-case NPV? The best-case NPV? If you set up your spreadsheet correctly, you only need to change the units sold to reflect the worst-case scenario and the best-case scenario to determine these NPVs. Use the worst-case, most likely (or base) case, and best-case NPVs and probabilities of occurrence to find the project’s expected NPV, standard deviation (σNPV), and coefficient of variation (CVNPV). Assume the company’s average project has a coefficient of variation (CVNPV) in the range of 1.0 to 1.8. Would the project being evaluated be classified as high risk, average risk, or low risk? Explain. The company typically adds or subtracts 3 percentage points to its normal, or average required rate of return to adjust for risk. After adjusting for its risk, should the project be purchased? The following tasks require application of the capital asset pricing model )CAPM) to recognize risk in capital budgeting. Assume the risk-free rate is 3 percent, the market risk premium is 7 percent, and the new project’s beta is 1.5. What is the project’s required rate of return on equity based on the CAPM? What is the project’s NPV using the required rate of return computed in c(1)? Should the project be purchased in this case?