Risk Analysis and Project Evaluation: NPV Sensitivity Analysis

Case Study: Assume that your group is working in Finance Department of a production company. Your company is considering to buy a new assembly line for launching a new product. With the new assembly line, the company expects to sell 6,500 products/ year for an average price of $350 per unit for 5 years. The new assembly line has the initial cost of $1,550,000, a residual value of $250,000 at the end of the project. The company will need to add $450 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:

Depreciation method: straight line

Variable cost per unit: $190

Cash fixed costs per year: $200,000

Corporate marginal tax: 30%

Upon the forecast of unexpected economic conditions that may be caused by the current breakout of corona virus, the company management requires your Team to prepare a risk analysis for the case, where:

Unit sales decrease by 15%

Price per unit decreases by 15%

Variable cost per unit increases 15%

Cash fixed cost per year increases by 15%

Required: Do an analysis with cash flows of the project to determine the sensitivity of the project NPV with the above estimated changes in the value drivers and provide your results in relevant tables.