DCF, sensitivity analysis, no income taxes. (CMA, adapted) Applewood Manufacturing Ltd. produces a variety of hand tools that are directly sold to local hardware stores in Alberta. The company's manager of sales has come up with a business plan to export to the United States, particularly to underserved states such as Montana and Wyoming. The following information for the business plan was developed from the best estimates of the sales, production, and administrative managers.

‘The business plan starts with a three-year contract and at the end of the three years the investment made will have a zero terminal disposal price.
Applewood Manufacturing uses discounted cash flow analysis in its decision making. Its required rate of return on this project is 20%.
The US is a new market for Applewood, and management is concerned about the reliability of the estimates and the proper consideration of all costs involved in the decision. The controller has proposed applying sensitivity analysis to selected factors, and is investigating some alternatives. Ignore income taxes in your calculations.
REQUIRED 1. What is the net present value of this investment proposal?
2. What is the effect on the net present value of the following three changes in assumptions?
Treat each item independently of the others.

a. 10% reduction in the selling price.

b. 10% reduction in annual sales in units.

c. 10% reduction in the variable cost per unit.
3. Discuss how management would use the data developed in requirements 1 and 2 in its consideration of the proposed capital investment.LO1

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Annual sales volume Selling price Cash variable costs 100,000 units $12 per unit $4.80 per unit Cash fixed costs $250,000 per year Investment required $380,000 Length of first contract 3 years