13-7. (Conducting a comprehensive risk analysis) (Related to Checkpoint 13.2 on page

415 and Checkpoint 13.3 on page 419) Blindfold Technologies Inc. (BTI) is con.

sidering whether to introduce a new line of hand scanners that can be used to copy

material and then download it into a computer. These scanners are expected to seil

for an average price of $100 each, and the company analysts performing the analysis

expect that the firm can sell 100,000 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 a

more advanced technology. In addition, the firm's management expects that variable

costs will be $20 per unit, and fixed costs, not including depreciation, are forecast to

be $1,250,000 per year. To manufacture this product, BTI will need to buy a comput-

erized production machine for $10 million that has an expected life of five years and

no residual or salvage value. In addition, the firm expects it will have to invest an

additional $450,000 in working capital to support the new business. Other pertinent

information concerning the business venture is as follows:

Determine the sensitivity of the project's NPV to a 10 percent increase in the vari-

able cost per unit.

Determine the sensitivity of the project's NPV to a 10 percent increase in the an-

nual fixed operating costs.

Initial cost of the machine Expected life Salvage value of the machine Working-capital requirement Depreciation method Depreciation expense Cash fixed costsexcluding depreciation Variable cost per unit Required rate of return or cost of capital Tax rate $10,000,000 5 years $0 $450,000 Straight-line $2,000,000 per year $1,250,000 per year $22.50 10% 20%