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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Expected or Base Case Worst Case Best Case 130,000 90 120 S (22) S18) S(1,200,000) S (900,000) S(2,000,000) S(2,000,000) 70,000 Unit sales Price per unit Variable cost per unit Cash fixed costs per year Depreciation expense 100,000 100 $ (20) $(1,000,000) $(2,000,000)