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

101 000

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

​$1 030 000

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

​$309 000

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

1 a

Initial investment Add working capital Total 10,300,000 309000 10,609,000

Units Amount $ 101000 Units sold per year Revenue/unit Variable cost/unit Total fixed cost Depreciation 9595 2121 1030000 2060000 969095000 Net Income Revenue less Expenses Variable Fixed cost Profit before depreciation & taxes Less depreciation Profit before taxes Taxes @34%*Net profit Net Profit -214221000 -1030000 753844000 -2060000 751784000 -255606560 496177440

For NPV net cash inflow is considered, since depreciation is non-cash expenses, it is added to net Iprofits to arrive at net cash inflow during the year So, net cash inflow Net profit Add depreciation Cash inflow each year 496177440 2060000 498237440 Net Present value Year Inflow/(Outflow) PV of Cash inflow PV of $1 @9.4% (b) (a*b) (10,609,000) (10,609,000) 498237440 0.914076782 455,427,276 498237440) 0.835536364 416,295,499 498237440 0.763744391 380,526,050 498237440 0.698121016 347,830,028 317,943,353 1,907,413,206 5

b.

NPV with 10% decrease in units Initial investment Add working capital Total 10,300,000 309000 10,609,000

Units Amount $ 90900 Units sold per year Revenue/unit Variable cost/unit Total fixed cost Depreciation 9595 2121 1030000 2060000 872185500 Net Income Revenue less Expenses Variable Fixed cost Profit before depreciation & taxes Less depreciation Profit before taxes Taxes @34%*Net profit Net Profit -192798900 -1030000 678356600 -2060000 676296600 -229940844 446355756

For NPV net cash inflow is considered, since depreciation is non-cash expenses, it is added to net profits to arrive at net cash inflow during the year So, net cash inflow Net profit Add depreciation Cash inflow each year 446355756 2060000 448415756

Net Present value Year Po Inflow/(Outflow) PV of Cash inflow PV of $1 @9.4% (b) (a*b) (10,609,000) (10,609,000) 448415756 0.914076782 409,886,431 448415756 0.835536364 374,667,670 448415756 0.763744391 342,475,019 448415756 0.698121016 313,048,463 448415756 0.638136212 286,150,332 1,715,618,916 Total Decrease in NPV with 10% decrease in units 191,794,290

10% decrease in price per unit Initial investment Add working capital Total 10,300,000 309000 10,609,000

Units Amount $ 101000 Units sold per year Revenue/unit Variable cost/unit Total fixed cost Depreciation 8635.5 2121 1030000 2060000 872185500 Net Income Revenue less Expenses Variable Fixed cost Profit before depreciation & taxes Less depreciation Profit before taxes Taxes @34%*Net profit Net Profit -214221000 -1030000 656934500 -2060000 654874500 -222657330 432217170

For NPV net cash inflow is considered, since depreciation is non-cash expenses, it is added to net profits to arrive at net cash inflow during the year So, net cash inflow Net profit Add depreciation Cash inflow each year 432217170 2060000 434277170

Net Present value Year Inflow/(Outflow) PV of Cash inflow PV of $1 @9.4% (b) (a*b) (10,609,000) (10,609,000) 434277170 0.914076782 396,962,678 434277170 0.835536364 362,854,368 434277170 0.763744391 331,676,753 434277170 0.698121016 303,178,019 434277170 0.638136212 277,127,988 1,661,190,806 Total Decrease in NPV with 10% decrease in unit sale price 246,222,400

NPV with 10% increase in variable cost Initial investment Add working capital Total 10,300,000 309000 10,609,000

Units Amount $ 101000 Units sold per year Revenue/unit Variable cost/unit Total fixed cost Depreciation 9595 2333.1 1030000 2060000 969095000 Net Income Revenue less Expenses Variable Fixed cost Profit before depreciation & taxes Less depreciation Profit before taxes Taxes @34%*Net profit Net Profit -235643100 -1030000 732421900 -2060000 730361900 -248323046 482038854

For NPV net cash inflow is considered, since depreciation is non-cash expenses, it is added to net profits to arrive at net cash inflow during the year So, net cash inflow Net profit Add depreciation Cash inflow each year 482038854 2060000 484098854

Net Present value Year Inflow/(Outflow) PV of Cash inflow PV of $1 @9.4% (b) (a*b) (10,609,000)| 1 (10,609,000) 484098854 0.914076782 442,503,523 498237440 0.835536364 416,295,499 498237440 0.763744391 380,526,050 498237440 0.698121016 347,830,028 498237440 0.638136212 317,943,353 1,894,489,453 Total Decrease in NPV with 10% increase in unit cost 12,923,753