You have developed a new hair growth drug that is expected to revolutionize the hair growth industry.

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Question:

You have developed a new hair growth drug that is expected to revolutionize the hair growth industry. Your product launch is expected to cost $1.9M, have a four-year life, and have a salvage value of $500,000. Your investment falls into class 14 and has a CCA rate of 25%. Sales are projected to start at 180,000 units per year and grow by 15% per year; price per unit will be $16; variable cost per unit will be $10, and fixed costs will be $450,000 per year. The price, and variable costs are both expected to grow by 3% per year. Net working capital is expected to be $200,000 per year. The required return on the project is 15% and the relevant tax rate is 20%.
a. What is your expected NPV and IRR for the project? Should you accept or reject this project?

b. What is the base, best, and worst-case scenario NPVs and IRRs if you think your unit sales, price, variable costs, and their respective growth rates values are accurate within 15%?
c. Evaluate the sensitivity of your NPV and IRR to changes in unit sales, price, variable costs, and their respective growth rates using ±10% and ±15%. Which variables show the most sensitivity?