Drill Ong Sdn Bhd has developed a powerful new hand drill that would be used for woodwork and carpentry activities. It would cost $1 million to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to 10% of sales. It would take 1 year to buy the required equipment and set up operations, and the project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years.

The firm believes it could sell 6,000 units per year. The drills would sell for $250 per unit, and DrillOng believes that variable costs would amount to $180 per unit. The companys fixed costs would be $110,000 at Year 1 and would increase with inflation. After the first year, the sales price and variable costs will also increase at the inflation rate of 3%.

The equipment would be depreciated over a 5-year period, using the straight-line method. The salvage value of the equipment at the end of the projects 5-year life is $50,000. The company however estimated the machine can be sold as scrap for RM60,000. The corporate tax rate is 25%.

The projects returns are expected to be highly correlated with returns on the firms other assets. The cost of capital is 12%.

1. Develop a spreadsheet model and use it to find the projects NPV, IRR, and payback.
2. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, number of units sold, the variable costs per unit, fixed costs and the cost of capital. Set these variables values at 20% above and 20% below their base-case values. Include a graph in your analysis.
3. Conduct a scenario analysis. Assume that the best-case condition is with the sales price increase by 10%, number of units sold 6,200 units, variable costs per unit and fixed cost increase 5% from the base-case value. The worst-case condition, with increase in the variable and fixed cost by 25% and with no change in the unit sales and unit price from the base value. The best-case condition, worst-case condition, and the base case are assumed to have an equal probability. What would be the projects coefficient of variation NPV?
4. On the basis of your analysis, would you recommend that the project be accepted? What added advise and special attention would you give for the company with regard to the project?