# Question: Blinkeria is considering introducing a new line of hand scanners

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 $100 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 $20 per unit, and fixed costs, not including depreciation, are forecast to be $1,000,000 per year. To manufacture this product, Blinkeria will need to buy a computerized production machine for $10 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 $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is as follows:

Initial cost of the machine ......... $10,000,000

Expected life ............... 5 years

Salvage value of the machine ........ $0

Working capital requirement ......... $300,000

Depreciation method ............ straight line

Depreciation expense ........... $2,000,000 per year

Cash fixed costs—excluding depreciation ... $1,000,000 per year

Variable costs per unit ............ $20

Required rate of return or cost of capital.... 10%

Tax rate .................. 34%

a. Calculate the project’s NPV.

b. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the number of units sold.

c. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the cost per unit.

d. Determine the sensitivity of the project’s NPV to a 10 percent increase in the variable cost per unit.

e. Determine the sensitivity of the project’s NPV to a 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 asfollows:

Initial cost of the machine ......... $10,000,000

Expected life ............... 5 years

Salvage value of the machine ........ $0

Working capital requirement ......... $300,000

Depreciation method ............ straight line

Depreciation expense ........... $2,000,000 per year

Cash fixed costs—excluding depreciation ... $1,000,000 per year

Variable costs per unit ............ $20

Required rate of return or cost of capital.... 10%

Tax rate .................. 34%

a. Calculate the project’s NPV.

b. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the number of units sold.

c. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the cost per unit.

d. Determine the sensitivity of the project’s NPV to a 10 percent increase in the variable cost per unit.

e. Determine the sensitivity of the project’s NPV to a 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 asfollows:

## Answer to relevant Questions

The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $600,000 and it is expected to have a six-year life with annual depreciation expense of ...Brackets, Inc. currently anticipates that if it had a 10 percent increase in sales, net operating profits would increase by 60 percent. If Brackets’ NOI is $14 million, what level of fixed costs does it have?Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:a. A bond that has a $1,000 par ...The preferred stock of Gator Industries sells for $35 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 500,000 more preferred shares just like the ones it currently ...Tellington Inc. recently discussed issuing a 10-year-maturity bond issue with the firm’s investment banker. The firm was advised that it would have to pay 8 to 9 percent on the bonds. Using Figure, what does this rate ...Post your question