Question

Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of

​$9595

​each, and the company analysts performing the analysis expect that the firm can sell

101 comma 000101,000

units per year at this price for a period of five​ years, after which time they expect demand for the product to end as a result of new technology. In​ addition, variable costs are expected to be

​$2121

per unit and fixed​ costs, not including​ depreciation, are forecast to be

​$1 comma 030 comma 0001,030,000

per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for

​$10.310.3

million that has no residual or salvage​ value, and will have an expected life of five years. In​ addition, the firm expects it will have to invest an additional

​$309 comma 000309,000

in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here:

Initial cost of the machine	​$10,300,000
Expected life	5 years
Salvage value of the machine	​$0
Working capital requirement	$309,000
Depreciation method	straight line
Depreciation expense	​$2,060,000 per year
Cash fixed costslong dash—excluding depreciation	​$1,030,000 per year
Variable costs per unit	​$21
Required rate of return or cost of capital	9.4​%
Tax rate	34%

a.  Calculate the​ project's NPV.

b.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent decrease in the number of units sold.

c.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent decrease in the price per unit.

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 10 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 10percent increase in the annual fixed operating costs.

f.  Use scenario analysis to evaluate the​ project's NPV under​ worst- and​ best-case scenarios for the​ project's value drivers. The values for the expected or​ base-case along with the​ worst- and​ best-case scenarios are listed​ here:

expected or base case worst case . best case

Unit sales                             101 000                      70 ,700.           131,300

Price per unit                        $95                    $87.40             $112.10

Variable cost per unit             $21                    ($22.89).           ($18.90)

Cash fixed costs per year      $(1,030,000)      $(1,215,400)     $(916,700)

Depreciation expense           $(2,060,000)       $(2,060,000)       $(2,060,000)      

Answer 1

a]

Operating cash flow (OCF) each year = earnings after tax + depreciation

In year 5, the entire working capital investment is recovered

NPV is calculated using NPV function in Excel

NPV is $8,657,020

A B C D E 0 1 21 41 2 Initial Investment 3 Cost of machine 4 Investment in working capital $10,300,000 $309,000 5 6 OCE 7 Units sold 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 OCF 101,000 $9,595,000 $2,121,000 $1,030,000 $2,060,000 $4,384,000 $1,490,560 $2,893,440 $2,060,000 $4,953,440 101,000 101,000 101,000 $9,595,000 $9,595,000 $9,595,000 $2,121,000 $2,121,000 $2,121,000 $1,030,000 $1,030,000 $1,030,000 $2,060,000 $2,060,000 $2,060,000 $4,384,000 $4,384,000 $4,384,000 $1,490,560 $1,490,560 $1,490,560 $2,893,440 $2,893,440 $2,893,440 $2,060,000 $2,060,000 $2,060,000 $4,953,440 $4,953,440 $4,953,440 101,000 $9,595,000 $2,121,000 $1,030,000 $2,060,000 $4,384,000 $1,490,560 $2,893,440 $2,060,000 $4,953,440 17 18 Terminal Cash Flow 19 Recovery of working capital $309,000 20 21 NPV Analysis 22 Project Cash Flows ($10,609,000) $4,953,440 $4,953,440 $4,953,440 $4,953,440 $5,262,440 23 24 NPV $8,657,020

A 2 Initial Investment 3 Cost of machine 10300000 4 Investment in working capital 309000 5 6 OCE 7 Units sold 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 OCF 101000 101000 101000 101000 101000 =C795 =D7*95 =E7.95 =F7.95 =G7.95 =C7*21 =D7621 =E7-21 =F7.21 =G7*21 1030000 1030000 1030000 1030000 1030000 =$B$3/5 =$B$3/5 =$B$3/5 =$B$3/5 =$B$3/5 =C8-C9-C10-C11 =D8-D9-D10-D11 =E8-E9-E10-E11 =F8-F9-F10-F11 =G8-G9-G10-G11 =C12*34% =D12*34% =E12*34% =F12.34% =G12*34% =C12-C13 =D12-D13 =E12-E13 =F12-F13 =G12-G13 =C11 =D11 =E11 =F11 =G11 =C14+C15 =D14+D15 =E14+E15 =F14+F15 =G14+G15 18 Terminal Cash Flow 19 Recovery of working capital =B4 20 =-B3-B4 =C16 =D16 =E16 =F16 =G16+G19 21 NPV Analysis 22 Project Cash Flows 23 24 NPV =NPV(9.4%,C22:G22)+B22

b]

If the number of units sold decreases by 10%, NPV is $6,758,066

% change in NPV = ($6,758,066 - $8,657,020) / $8,657,020 = -21.94%

If the number of units sold decreases by 10%, NPV decreases by 21.94%

f =101000*(1-10%) D E F 2. $10,300,000 $309,000 А 1 2 Initial Investment 3 Cost of machine 4. Investment in working capital 5 6 OCF 7 Units sold 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 OCF 17 18 Terminal Cash Flow 19 Recovery of working capital 20 21 NPV Analysis 22 Project Cash Flows 23 24 NPV 90,900 90,900 90,900 90,900 90,900 $8,635,500 $8,635,500 $8,635,500 $8,635,500 $8,635,500 $1,908,900 $1,908,900 $1,908,900 $1,908,900 $1,908,900 $1,030,000 $1,030,000 $1,030,000 $1,030,000 $1,030,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $3,636,600 $3,636,600 $3,636,600 $3,636,600 $3,636,600 $1,236,444 $1,236,444 $1,236,444 $1,236,444 $1,236,444 $2,400,156 $2,400,156 $2,400,156 $2,400,156 $2,400,156 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $4,460,156 $4,460,156 $4,460,156 $4,460,156 $4,460,156 $309,000 ($10,609,000) $4,460,156 $4,460,156 $4,460,156 $4,460,156 $4,769,156 $6,758,066

c]

If the selling price decreases by 10%, NPV is $6,219,174

% change in NPV = ($6,219,174 - $8,657,020) / $8,657,020 = -28.16%

If the selling price decreases by 10%, NPV decreases by 28.16%

C8 fic А =C7*95*(1-10%) DE 2 5 2 3 4 Initial Investment Cost of machine Investment in working capital $10,300,000 $309,000 10 - Five 6 OCE 7 Units sold Revenues - Variable Costs - Fixed Costs - Depreciation Earnings before tax - Taxes Earnings after tax + Depreciation 16 OCF 101,000 $8,635,500 $2,121,000 $1,030,000 $2,060,000 $3,424,500 $1,164,330 $2,260,170 $2,060,000 $4,320,170 101,000 101,000 101,000 101,000 $8,635,500 $8,635,500 $8,635,500 $8,635,500 $2,121,000 $2,121,000 $2,121,000 $2,121,000 $1,030,000 $1,030,000 $1,030,000 $1,030,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $3,424,500 $3,424,500 $3,424,500 $3,424,500 $1,164,330 $1,164,330 $1,164,330 $1,164,330 $2,260,170 $2,260,170 $2,260,170 $2,260,170 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $4,320,170 $4,320,170 $4,320,170 $4,320,170 $309,000 18 Terminal Cash Flow 19 Recovery of working capital 20 21 NPV Analysis 22 Project Cash Flows ($10,609,000) $4,320,170 $4,320,170 $4,320,170 $4,320,170 $4,629,170 23 24 NPV $6,219,174

d]

If the variable cost increases by 10%, NPV is $8,118,128

% change in NPV = ($8,118,128 - $8,657,020) / $8,657,020 = -6.22%

If the variable cost increases by 10%, NPV decreases by 6.22%

C9 =C7*21*(1+10%) fax B D E F G 2 3 4 5 $10,300,000 $309,000 6 8 Initial Investment 3 Cost of machine 4 Investment in working capital 5 OCF 7 Units sold Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 OCF 17 18 Terminal Cash Flow 19 Recovery of working capital 20 21 NPV Analysis 22 Project Cash Flows 101,000 101,000 101,000 101,000 101,000 $9,595,000 $9,595,000 $9,595,000 $9,595,000 $9,595,000 $2,333,100 $2,333,100 $2,333,100 $2,333,100 $2,333,100 $1,030,000 $1,030,000 $1,030,000 $1,030,000 $1,030,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $4,171,900 $4,171,900 $4,171,900 $4,171,900 $4,171,900 $1,418,446 $1,418,446 $1,418,446 $1,418,446 $1,418,446 $2,753,454 $2,753,454 $2,753,454 $2,753,454 $2,753,454 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $2,060,000 $4,813,454 $4,813,454 $4,813,454 $4,813,454 $4,813,454 $309,000 ($10,609,000) $4,813,454 $4,813,454 $4,813,454 $4,813,454 $5,122,454 23 24 NPV $8,118,128