Question

(Related to Checkpoint 13.2 and Checkpoint​ 13.3) ​ (Comprehensive risk​ analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of ​$95 ​each, and the company analysts performing the analysis expect that the firm can sell 105,000 units per year at this price for a period of five​ years, after which time they expect demand for the product to end as a result of new technology. In​ addition, variable costs are expected to be ​$18 per unit and fixed​ costs, not including​ depreciation, are forecast to be ​$1,100,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $9.1 million that has no residual or salvage​ value, and will have an expected life of five years. In​ addition, the firm expects it will have to invest an additional ​$304,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here: 

Initial cost of the machine    $9,100,000
Expected life    5 years
Salvage value of the machine    $0
Working capital requirement    $304,000
Depreciation method    straight line
Depreciation expense    $1,820,000 per year
Cash fixed costs—excluding depreciation    $1,100,000 per year
Variable costs per unit   $18
Required rate of return or cost of capital    9.1%
Tax rate    34%

a.  Calculate the​ project's NPV.

b.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the number of units sold.

c.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the price per unit.

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the annual fixed operating costs.

f.  Use scenario analysis to evaluate the​ project's NPV under​ worst- and​ best-case scenarios for the​ project's value drivers. The values for the expected or​ base-case along with the​ worst- and​ best-case scenarios are listed​ here:

   Expected or Base Case   Worst Case   Best Case
Unit sales    105,000   72,450   137,550
Price per unit    $95   $83.60   $112.10
Variable cost per unit    $(18)   $(19.80)   $(16.56)
Cash fixed costs per year    $(1,100,000)   $(1,298,000)   $(1,001,000)
Depreciation expense    $(1,820,000)   $(1,820,000)   $(1,820,000)

Answer 1

A) before calculating the NPV we need to calculate the project after tax cash flows

B)

C).

D)