Your group is working in Finance Department of a production company. Your company is considering a new investment project. In the new project, the company will buy a new machinery that enable to launch a new product. It is expected an annual sale of 20,000 products for an average price of $450 per unit for 5 years. The new investment project has the initial cost of $1,850,000, a residual value of $350,000 at the end of the project. The company will need to add $400 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:


Depreciation method: straight line
Variable cost per unit: $270
Cash fixed costs per year: $350,000
Corporate marginal tax: 30%
Discount rate: 7% (see note below)

Your Finance Department conducted some economics forecast and estimated that in the coming time, the enduring covid-19 pandemic may cause uncertainty in the economic recovery. You Finance Department decides to do a scenario analysis to determine the sensitivity of the project’s NPV to different scenarios. 

 

Required:

Calculation NPV:

  1. Original Case: As per details give above.
  2. Worst case: The pandemic continues, causing: Unit sales decrease by 15%; price per unit decreases by 15%; variable cost per unit increases by 15 %; cash fixed cost per year increases by 15%
  3. Best case: The pandemic is gone, economy is recovered well, enabling: Unit sales increase by 15%; price per unit increases by 15%; variable cost per unit decreases by 15%; cash fixed cost per year decreases by 15%.

Note: Solution is available in excel file only. You can use any discount rate in the solution file and get answer for that discount rate.

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