Problem 3 Allied Corporation is considering introducing a new project S to the way. Along the way, Allieds finance staff has received a lot of information, the highlights of which are

Project S will require Allied to purchase $1,200,000 of equipment in year t=0. Inventory will increase by $175,000 and accounts payable will increase by $75,000. All working capital stay the same so the change in net working capital will be $100,000 in year t=0. The net working capital will reduce by 2% every year till year 4.

The project will last for 4 years. The company forecasts the following sales: 2,720,000 units in year 1, 2,640,000 units in year 2, 2,515,000 units in year 3 and 2,430,000 units in year 4. Each unit will sell for $2. The fixed cost of producing these goods will be $2,000,000 each year and the variable cost of producing each unit will be $1.0196 in year 1 and $1.1973 in years 2, 3 and 4. The estimated tax rate is 25%. The equipment will be depreciated on straight line basis. When the project finishes in year 4, the company expects that it will be able to salvage the equipment for $50,000 and will fully recover the last working capital. Based on perceived risk, the projects WACC is estimated to be 10%. Using the following information, calculate the NPV of the project. Also perform a sensitivity and scenario analysis. For sensitivity analysis, the finance staff is thinking about the following:

1) What if the market conditions force the price of the product to be sold at $1.80 and not $2? 2) What if the variable costs are 10% higher than expected? 3) What is the WACC is 15% and not 10%?