show the process

Problem #5 Sensitivity and Scenario Analyses Consider the following "base case" capital Project: Unit Price Annual unit sales Variable cost per unit Investment in fixed capital Investment in working capital Project life Depreciation (straight line) Expected salvage value Tax rate $6.50 52,000 $1.75 $350,000 $60,000 7 years $50,000 $45,000 35 percent 11 percent Required rate of return (a) Calculate the incremental operating cash flows. Cash Flows = (b) Calculate the terminal year after-tax non-operating cash flow. TNOCF = TNOCE = (c) Calculate the NPV. Net Present Value (NPV) = Internal rate of return (IRR) = (d) We will now perform a sensitivity analysis by recalculating the NPV by changing the value of one variable at a time. Consider the following base, low and high values for each of the input variables listed below. Low value Unit price $6.00 Annual unit sales Base value $6.50 52,000 $1.75 $45,000 35 percent 11 percent 50,000 $1.50 Variable cost per unit Expected salvage value Tax rate Required rate of return High value $7.00 55,000 $2.00 $60,000 40 percent 13 percent $30,000 30 percent 10 percent Fill out the table below by recalculating the NPV under each individual change. Project NPV Variable With low estimate with high estimate Range of estimates Unit price Annual unit sales Variable cost per unit Expected salvage value Tax rate Required rate of return (e) Which of the variables has the most effect on NPV? How do you explain it? (f) We continue with the same problem set up. Consider the following three scenarios: SCENARIO Variable Pessimistic Optimistic $7.00 Unit price Most likely $6.50 52,000 $6.00 Annual unit sales 50,000 55,000 Variable cost per unit $2.00 $1.75 $1.50 Investment in fixed capital $385,000 $350,000 $315,000 $40,0000 Investment in working capital $80,000 $60,000 Project life 7 years 7 years 7 years Depreciation (straight line) $50,000 $55,000 $30,000 40 percent $45,000 $60,000 Salvage value Tax rate $45,000 35 percent 11 percent 30 percent Required rate of return 13 percent 10 percent Based on these values above, calculate the NPV under these three scenarios. Fill out table below. Pessimistic Most likely Optimistic NPV