7. Indy Automotive Products is considering a capital budgeting proposal to manufacture after-market performance exhaust systems for the next three years. The initial investment in machinery would total $3,300,000. This amount would be depreciated according to the 3-year MACRs schedule (see Exhibit below). The relevant cost of capital has been estimated to be 11% and the applicable tax rate is 30%. The project would require an immediate NWC investment of $200,000, and this entire amount would be completely recovered at the end of the projects life after the third year. The machinery would have a salvage value of $300,000 (before tax) after three years. The following represent the yearly cash flow projections: (6 points) Pessimistic Middle Scenario Optimistic Sales (in units) 8000 9000 10000 Price per unit $375 $400 $425 Variable costs (per unit) $160 $150 $140 Fixed Production costs $600,000 $550,000 $500,000 Probability of outcome 30% 40% 30% *For simplicity, assume that the state which is realized at t=1 will be in effect for the projects duration. a) Conduct a scenario analysis for the 3 cases specified. What is the NPV in each scenario? The table below shows the Excel template I used for estimating the Pessimistic scenario with the correct answer for that part --you may want to use this format for building your own spreadsheet. b) What is the expected (i.e. probability-weighted) NPV for the project? c) Conduct a sensitivity analysis on Price Per unit variable costs. Specifically, calculate the dollar change in NPV, given a 10% change in the Price per unit from its most likely case value. [For instance, suppose you were to vary the sales price by 10% upward from its most likely value and doing so increased NPV from $25,000 to $33,000. You would respond here as follows: "A 10% change in the Sales price per unit from its most likely value leads to an $8,000 change in NPV.]

Possimistic case Sales Quantity Sales Price Variable costs /unit foxed production costs Input value 8,000 375 $160 $160 100% $3.000,000.00 (1,280,000.00) 800,000.00) $3,000,000.00 1,280,000.00) 1,280,000.00) 800,000.00) $3,000,000.00 variable costs fxed production costs EBIT EBIAT Add back depreciation OCF capital ivestment Net cash flow (800,000.00) $20,110.00 033 $348,850.00 04,055.00 242,795.00 831,270.00 30% 89 381 441,889.00 488,730.00 099,890.00 $930,619.00 283,359.00 200,000.00 $1,413,978.00 $1,113,967.00 $1 224,055.00 (3,300,000.00) 000.00 $3,500,000.00 $469,067.10) $1,113,967.00 $1 224,055.00 NPV@1 1% MACRS Depreciation Percentages -Half-Year Convention To be used for any problem on this assignment with MACRS depreciation) PROPERTY CLASS RECOVERY YEAR 3-YEAR S-YEAR 7-YEAR 10-YEAR 33.33% 44.45 14.81 7.41 20.00% 32.00 19.20 11.52 11.52 5.76 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 10.00% 18.00 14.40 11.52 922 7-37 6.55 6.55 6.55 3.28 Totals 100.00% 100.00% 100.00% 100.00%