Assume that your group is working in the Finance Department of a production company. Your company is
Question:
Assume that your group is working in the Finance Department of a production company. Your company is considering buying a new assembly line for launching a new product. With the new assembly line, the company expects to sell 7,500 products/ year for an average price of $450 per Unit for 5 years. The new assembly line has: the initial cost of $1,850,000, and a residual value of $250,000 at the end of the project. The company will need to add $450 000 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: $210
Cash fixed costs per year: $200,000
Corporate marginal tax: 30%
Discount rate: 12.5%
Upon the forecast of unstable economic conditions, the BOM requires your Team to prepare a risk analysis for the case where:
Unit sales decrease by 15%
Price per Unit decreases by 15%
Variable cost per Unit increases 15%
Cash fixed cost per year increases by 15%
Required:
Do an analysis with cash flows of the project to determine the sensitivity of the project NPV with the above estimated changes in the value drivers and provide your results in relevant tables.
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young