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 ​$105 each, and the company analysts performing the analysis expect that the firm can sell 101,000 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 $19 per unit and fixed​ costs, not including​ depreciation, are forecast to be ​$1,060,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $9.3 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 $306000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here: 

Initial cost of the machine	​$9,300,000
Expected life	55 years
Salvage value of the machine	​$00
Working capital requirement	​$306,000
Depreciation method	straight line
Depreciation expense	​$1,860,000 per year
Cash fixed costslong dash—excluding depreciation	​$1 060, 000 per year
Variable costs per unit	​$19
Required rate of return or cost of capital	10.5​%
Tax rate	34​%

	Expected or Base Case		Worst Case		Best Case
Unit sales	101,000		69,690		132,310
Price per unit	​$105		​$95.55		124.95
Variable cost per unit	​$((19)		​$( 21.28 )		​$( 17.10 )
Cash fixed costs per year	​(1,060,000)		​$(1,261,400)		​$(932,800)
Depreciation expense	​$(1,860,000)		​$(1,860,000)		​(1,860,000)

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: 

Answer 1

a) The NPV of the project is $11,785,130

b) The sensitivity of the project's NPV to an 8 percent decrease in sales volume is 17.01%

c) Sensitivity of the​ project's NPV to​ an 8 percent decrease in the price per unit is 17.78%

d) Sensitivity of the​ project's NPV to​ an 8 percent increase in the variable cost per unit is 3.22%

e) Sensitivity of the​ project's NPV to​ an 8 percent increase in the annual fixed operating costs 1.78%