Question

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:


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  • CreatedOctober 31, 2014
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