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 ​$98 ​each, and the company analysts performing the analysis expect that the firm can sell 101,000 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 $21 per unit and fixed​ costs, not including​ depreciation, are forecast to be $1,040,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $9.3 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 $301,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here:

Initial cost of the machine	​$9,300,000
Expected life	5 years
Salvage value of the machine	​$0
Working capital requirement	​$301,000
Depreciation method	straight line
Depreciation expense	​$1,860,000 per year
Cash fixed costs—excluding depreciation	​$1,040,000 per year
Variable costs per unit	​$21
Required rate of return or cost of capital	9.2​%
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) 10 percent 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    $98 $87.22 $118.58
Variable cost per unit $(21) $(23.10) $(19.11)
Cash fixed costs per year    $(1,040,000) $(1,248,000) $(956,800)
Depreciation expense $(1,860,000) $(1,860,000) $(1,860,000)

Answer 1

in $
Year	0	1	2	3	4	5
No. of units sold (A)	-	101,000.00	101,000.00	101,000.00	101,000.00	101,000.00
Price per unit (B)	-	98.00	98.00	98.00	98.00	98.00
Revenue (A)*(B)	-	9,898,000.00	9,898,000.00	9,898,000.00	9,898,000.00	9,898,000.00
Variable Cost (C )=21*(A)	-	2,121,000.00	2,121,000.00	2,121,000.00	2,121,000.00	2,121,000.00
Fixed Costs (D)	-	1,040,000.00	1,040,000.00	1,040,000.00	1,040,000.00	1,040,000.00
Depreciation (E )	-	1,860,000.00	1,860,000.00	1,860,000.00	1,860,000.00	1,860,000.00
Earning Before Tax (F)	-	4,877,000.00	4,877,000.00	4,877,000.00	4,877,000.00	4,877,000.00
Tax @ 34% of (F)= (G)	-	1,658,180.00	1,658,180.00	1,658,180.00	1,658,180.00	1,658,180.00
Profit After Tax (H)=(F)-(G)	-	3,218,820.00	3,218,820.00	3,218,820.00	3,218,820.00	3,218,820.00
Working Capital (I)	-	301,000.00	301,000.00	301,000.00	301,000.00	301,000.00
Change in Working Capital (L)	-	301,000.00	-	-	-	-
Capital Expenditure(J)	9,300,000.00	-	-	-	-	-
Free Cash Flow (K)=(H)-(J)-(L)+(E )	-9,300,000.00	4,777,820.00	5,078,820.00	5,078,820.00	5,078,820.00	5,078,820.00
Discounted Cash Flow @ 9.2%	-9,300,000.00	4,375,293.04	4,259,097.13	3,900,272.10	3,571,677.74	3,270,767.17
Answer
(a) NPV	10,077,107.18
(b) NPV for 10% decrease in no. of units sold	8,090,936.79
(c) NPV for 10% decrease in the price per unit	7,549,253.95
(d) NPV for 10% increase in the variable cost per unit	9,535,424.34

Note: Working Capital requirement is considered for each year

The formula for NPV is: NPV = (K₀)/(1+9.2%)⁰ + (K₁)/(1+9.2%)¹+ (K₂)/(1+9.2%)² + (K₃)/(1+9.2%)³ +(K₄)/(1+9.2%)⁴ + (K₅)/(1+9.2%)⁵