Question

Hello - I'm looking for the answer to the F question below:

You must analyze a potential new product--a caulking compound that Cory Mateials' R&D people developed for use in the

residential construction industry. Cory's marketing manager thinks the company can sell 115,000 tubes per year for 3

years at a price of $3.25 each, after which the product will be obsolete. The required equipment would cost $150,000, plus

another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000,

while current liabilities (accounts payable and accruals) would rise by $15,000. Variable costs would be 60% of sales

revenues, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under

MACRS with a 3-year life. (Yr1 = 33%, Yr2 = 45%, Yr3 = 15%, Yr4 = 7%) When production ceases after 3 years,

the equipment should have a market value of $15,000. Cory's tax rate is 40%, and it uses a 10% WACC for average-risk

projects.

a.   Find the required Year 0 investment and the project's annual net cash flows. Then calculate the project's

NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk.

b. Suppose you now learn that R&D costs for the new product were $30,000 and that those costs were incurred and

expensed for tax purposes last year. How would this affect your estimate of NPV and other profitability measures?

c. If the new project would reduce cash flows from Cory's other projects and if the new project would be housed

in an empty building that Cory owns and could sell, how would those factors affect the project's NPV?

d. Are this project's cash flows likely to be positively or negatively correlated with returns on Cory's other

projects and with the economy, and should this matter in your analysis? Explain.

e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines that will upgrade its manufacturing

plant. These machines are considered average-risk projects, so management will evaluate them at the firm's 10%

WACC. Machine X has a life of 4 years, while Machine Y has a life of 2 years. The cost of each machine is $60,000;

however, Machine X provides after-tax cash flows of $25,000 per year for 4 years and Machine Y provides after-tax cash

flows of $42,000 per year for 2 years. The manufacturing plant is very successful, so the machines manufacturing

plant is very successful, so the machines will be repurchased at the end of each machine's useful life. In other words,

the machines are "repeatable" projects.

(1) Using the replacement chain approach, what is the NPV of the better machine?

(2) Using the EAA approach, what is the EAA of the better machine?

f. The CEO expressed concern that some of the base-case inputs might be too optimistic or too pessimistic. He

wants to know how the NPV would be affected if these 6 variables were all 20% better or 20% worse than

the base-case level: unit sales, sales price, variable costs, fixed costs, WACC, and equipment cost. Hold

other things constant when you consider each variable, and construct a sensitivity graph to illustrate your

results.

Hello - I'm looking for the answer the F questions:

f. The CEO expressed concern that some of the base-case inputs might be too optimistic or too pessimistic. He
wants to know how the NPV would be affected if these 6 variables were all 20% better or 20% worse than
the base-case level: unit sales, sales price, variable costs, fixed costs, WACC, and equipment cost. Hold
other things constant when you consider each variable, and construct a sensitivity graph to illustrate your
results.

Answer 1

F)

The Base NPV value is $4014 which has been indicated in yellow all throughout the excel below.

% Deviation From Base Case	Unit Sales
	Unit Sales	NPV ($)		% Deviation From Base Case	WACC
		4014			WACC	NPV ($)
-20%	92000	-40600				4014
-10%	103500	-18293		-20%	8%	11569
0%	115000	4014		-10%	9%	7733
10%	126500	26321		0%	10%	4014
20%	138000	48628		10%	11%	407
				20%	12%	-3093
% Deviation From Base Case	Variable Costs			% Deviation From Base Case	Sales Price
	Variable Costs($)	NPV ($)			Sales Price($)	NPV ($)
		4014				4014
-20%	1.56	70935		-20%	2.6	-40600
-10%	1.76	37475		-10%	2.93	-18293
0%	1.95	4014		0%	3.25	4014
10%	2.15	-29446		10%	3.58	26321
20%	2.34	-62907		20%	3.9	48628
% Deviation From Base Case	Fixed Costs			% Deviation From Base Case	Equipment Costs
	Fixed Costs($)	NPV ($)			Equipment Costs($)	NPV ($)
		4014				4014
-20%	56000	24904		-20%	140000	27294
-10%	63000	14459		-10%	157500	15654
0%	70000	4014		0%	175000	4014
10%	77000	-6431		10%	192500	-7625
20%	84000	-16875		20%	210000	-19265
	NPV At Different Deviations From Base
% Deviation From Base Case	Sales Price($)	Variable Cost($)	Unit Sales($)	Fixed Cost($)	WACC($)	Euipment Cost($)
-20%	-40600	70935	-40600	24904	11569	27294
-10%	-18293	37475	-18293	14459	7733	15654
0%	4014	4014	4014	4014	4014	4014
10%	26321	-29446	26321	-6431	407	-7625
20%	48628	-62907	48628	-16875	-3093	-19265

The graph of Sensitivity Analysis has been derived from the table above.