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 104,000 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 $1,070,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $10.2 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 $307,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here:

​Initial cost of the machine: $10,200,000

Expected life: 5 years

Salvage value of the machine: $0

Working capital requirement: $307,000

Depreciation method: straight line

Depreciation expense: $2,040,000 per year

Cash fixed-excluding depreciation: $1,070,000 per year

Variable costs per unit: $18

Required rate of return or cost of capital: 9.3%

Tax rate: 34%

a.  Calculate the​ project's NPV.

b.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent decrease in the number of units sold.

c.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent decrease in the price per unit.

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 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	104000	71760	136240
Price per unit	$95	$83.60	$114.95
Variable cost per unit	$(18)	$(19.62)	$(16.38)
Cash fixed costs per year	$(1,070,000)	$(1,262,600)	$(941,600)
Depreciation expense	$(2,040,000)	$(2,040,000)	$(2,040,000)

Answer 1