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You must analyze a potential new product - a caulking compound that Cory Materials' R&D people developed for use in the residential construction industry. Cory's marketing manager thinks the company can sell the 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The purchase price of the required equipment, including shipping and installation costs, is 175,000, and the equipment is eligible for 100% bonus depreciation at the time of purchase. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, and fixed costs would be $70,000 per year. When production ceases after 3 years, the equipment should have a market value of $15,000. Cory's tax rate is 25%, and it uses a 10% WACC for average-risk projects.

d. Are this projects cash flows likely to be positively or negatively correlated with returns on Cory's other projects and with the economy, and should this matter in your analysis? Explain

e. Construct a spreadsheet that calculated the cash flows, NPV, IRR, payback, and MIRR.

f. The CEO expressed concern that some of the base-case inputs for the caulking compound might be too optimistic or too pessimistic and he wants to know how the NPV would be affected if these six variables were 20% above or 20% below the base-case levels: unit sales, sales price, variable cost, fixed costs, WACC, and equipment cost.

g. Do scenario analysis based on the assumption that there is a 25% probability that each of the six variables itemized in part f will turn out to have their best-case values as calculated in part f, a 50% probability that all will have their worst-case values. The other variables remain at base case levels. Calculate the expected NPV, the standard deviation of NPV, and coefficient of variation.

h. Does Cory's management use the risk-adjusted discount rate to adjust for project risk? Explain.