Question

Perform a scenario analysis with data provided

Assume that your selected company is considering a potential project with a new product that is expected to sell for an average price of $30 per unit and the company expects it can sell 350,000 units per year at this price for a period of 4 years. Launching this project will require purchase of a $3,500,000 equipment that has residual value in four years of $500,000 and adding $ 1,000,000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:

Depreciation method: straight line Variable cost per unit: $20

Cash fixed costs per year $450,000 Discount rate: 12%

Tax Rate: 35%

Do a SCENARIO ANALYSIS with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the worst- and best-case outcomes for the project. Your group needs to provide the results in (a) relevant tables:

Worst case: Unit sales decrease by 20%; price per unit decreases by 20%; variable cost per unit increases by 20 %; cash fixed cost per year increases by $200,000

Best case: Unit sales increase by 20%; price per unit increases by 20%; variable cost per unit decreases by 20%; cash fixed cost per year decreases by $200,000

Based on scenario analysis outcome,draw relevant conclusion about project NPV's sensitivity

Answer 1

Base Case NPV

The same with Excel formulas shown:

Worst Case NPV

The same with Excel formulas shown:

Best Case NPV

The same with Excel formulas shown:

The Base Case NPV of the Project is $3,272,126, Worst case NPV is Negative $4,032,699 and Best Case NPV is $13,340,939.