Blindfold Technologies Inc. (BTI) is considering whether to introduce a new line of hand scanners that can be used to copy material and then download it into a 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 a more advanced technology. In addition, the firm's management expects that variable costs will be $20 per unit, and fixed costs, not including depreciation, are forecast to be $1,250,000 per year. To manufacture this product, BTI will need to buy a computerized production machine for $10 million that has an expected life of five years and no residual or salvage value. In addition, the firm expects it will have to invest an additional $450,000 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 ........................................$450,000

Depreciation method .................................................Straight-line

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

Cash fixed costs-excluding depreciation .......................$1,250,000 per year

Variable cost per unit ...............................................$22.50

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

Tax rate ..............................................................20%

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 the worst-and best-case scenarios for the project's value drivers. The values for the expected or base-case, worst-case, and best-case scenarios are as follows:

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Expected or Base Case Worst Case 70,000 90 (25) Best Case Unit sales Price per unit Variable cost per unit Cash fixed costs per year Depreciation expense 100,000 100 S (22.50) (1,000,000) $(2,000,000) 130,000 120 (18) $(1,200,000) 900,000) $(2,000,000) (2,000,000)