Question

Blindfold Technologies Inc. (BTI) is considering

whether to introduce a new line of hand scanners that can be used to copy

material and then download it into a computer. These scanners are expected to sell

for an average price of $100 each, and the company analysts performing the analysis

expect that the firm can sell 100,000 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 a

more advanced technology. In addition, the firm’s management expects that variable

costs will be $20 per unit, and fixed costs, not including depreciation, are forecast to

be $1,250,000 per year. To manufacture this product, BTI will need to buy a computerized

production machine for $10 million that has an expected life of five years and

no residual or salvage value. In addition, the firm expects it will have to invest an

additional $450,000 in working capital to support the new business. Other pertinent

information concerning the business venture is as follows:

a. Calculate the project’s NPV.

b. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the

number of units sold.

c. Determine the sensitivity of the project’s NPV to a 10 percent decrease in the cost

per unit.

d. Determine the sensitivity of the project’s NPV to a 10 percent increase in the variable

cost per unit.

e. Determine the sensitivity of the project’s NPV to a 10 percent increase in the annual

fixed operating costs.

f. Use scenario analysis to evaluate the project’s NPV under the worst- and bestcase

scenarios for the project’s value drivers. The values for the expected or basecase,

worst-case, and best-case scenarios are as follows: