Question

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 ​$102 ​each, and the company analysts performing the analysis expect that the firm can sell 100 000 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​$1,010,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $10.6 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 $305,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here.

Initial cost of the machine    $10,600,000
Expected life    5 years
Salvage value of the machine    $0
Working capital requirement    $305,000
Depreciation method    straight line
Depreciation expense    $2,120,000 per year
Cash fixed costs—excluding depreciation    $1,010,000 per year
Variable costs per unit   $19
Required rate of return or cost of capital    9.2%
Tax rate    34%

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 9 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 9 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.

Expected or Base Case   Worst Case   Best Case
Unit sales    100,000   68,000   132,000
Price per unit    $102   $90.78   $121.38
Variable cost per unit    $(19)   $(20.52)   $(17.29)
Cash fixed costs per year    $(1,010,000)   $(1,222,100)   $(898,900)
Depreciation expense    $(2,120,000)   $(2,120,000)   $(2,120,000)

Answer 1