For this activity, refer to the Surf Print Table & Floor Lamps example. Assume that sale price follows a lognormal distribution with mean of $48 and standard deviation of $4.80 and the variable production costs follow a lognormal distribution with mean of $20 and standard deviation of $2. Also, assume that the required rate of return follows a uniform distribution between 18% and 30%. What is the expected NPV? What is the probability that the NPV is less than zero? What variable is the NPV most sensitive to?

Surf Print Table & Floor Lamps example below:

Unit sales 1^st year - 6,000

Price/ unit - $48

Growth Rate in sales - 8%

Networking Capital - $28,000

Annual fixed costs - $80,000

Variable cost/ unit - $20

Equipment Cost - $145,000

Useful life - 5

Tax rate - 34%

Required return - 25%

Time01 2 3 4 5

Unit Sales6,0006,480 6,998 7,558 8,163

Revenue$288,000$311,040$335,923$362,797$391,821

Fixed costs$80,000$80,000$80,000 $80,000$80,000

Variable costs$120,000$129,600$139,968$515,165$163,259

Deprecation$29,000$29,000$29,000$29,000$29,000

EBIT$59,000$72,440$86,955$102,632$119,562

Taxes$20,060$24,630$29,565$34,895$40,651

Net income $38,940 $47,810 $57,390 $67,737 $78,911

Operating cash flows$67,940 $76,810 $86,390 $96,737 $107,911

Investments:

Initial outlay$(145,000)

Networking capital $(28,000)$28,000

Total cash flows $(173,000)$67,940$76,810 $86,390 $96,737 $135,911

NPV$58,901