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 ?$98 ?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 $19 per unit and fixed? costs, not including? depreciation, are forecast to be ?$1,030,000 per year. To manufacture this? product, Blinkeria will need to buy a computerized production machine for ?$9.7 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 $310,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided:
Initial cost of the machine $9,700,000
Expected life 5 years
Salvage value of the machine $0
Working capital requirement $310,000
Depreciation method straight line
Depreciation expense $1,940,000 per year
Cash fixed costs—excluding depreciation $1,030,000 per year
Variable costs per unit $19
Required rate of return or cost of capital 10.2%
Tax rate 34%
a. Calculate the project's NPV.
b. Determine the sensitivity of the project's NPV to a(n)12 percent decrease in the number of units sold.
c. Determine the sensitivity of the project's NPV to a(n) 12 percent decrease in the price per unit.
d. Determine the sensitivity of the project's NPV to a(n) 12 percent increase in the variable cost per unit.
e. Determine the sensitivity of the project's NPV to a(n) 12 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 104,000 73,840 134,160
Price per unit $98 $87.22 $116.62
Variable cost per unit $(19) $(20.52) $(17.29)
Cash fixed costs per year $(1,030,000) $(1,256,600) $(916,700)
Depreciation expense $(1,940,000) $(1,940,000) $(1,940,000)