A manufacturer is planning to produce and sell a new product It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the product The project would require net working capital at the beginning of each year in an amount equal to 15 of the year's projected sales for example, NWC 0 15 (Sales 1 ) The product would sell for $30 per unit, and believes that variable costs would amount to $15 per unit After Year 1, the sales price and variable costs will increase at the inflation rate of 3 The project's fixed costs would be $500,000 year in Year 1 and would increase with inflation The products will be sold for 4 years If the project is undertaken, it must be continued for the entire 4 years The firm believes it could sell 500,000 units per year The equipment would be depreciated over using straight line depreciation The estimated market value of the equipment at the end of the projects 4 year life is $500,000 The federal plus state tax rate is 40 Its cost of capital is 10 Do parts a e in Excel a ) find the projects NPV, IRR, and payback Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold Set these variables values at least 5 , 10 , and 20 above and below their base case values Include a graph in your analysis To which variable does NPV appear most sensitive (Suggestions Use Excels Data Table feature, or re calculate the NPV of each input level and then copy and paste the results) Now conduct a scenario analysis Assume that there is a 25 probability that best case conditions, with each of the variables discussed in Part b being 20 better than its base case value, will occur There is a 25 probability of worst case conditions, with the variables 20 worse than base, and a 50 probability of base case conditions (Suppose the average CV of this company's projects is 2 0 Is this project more or less risky than the average project for this company ) Set up your own numerical example of a real option You can choose either a timing or an abandonment option Use any probabilities and cash flows that make sense

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A manufacturer is planning to produce and sell a new product. It would cost $20 million at Year 0 to buy the equipment necessary to

A manufacturer is planning to produce and sell a new product. It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the product. The project would require net working capital at the beginning of each year in an amount equal to 15% of the year's projected sales; for example, NWC₀ = 15%(Sales₁). The product would sell for $30 per unit, and believes that variable costs would amount to $15 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The project's fixed costs would be $500,000/year in Year 1 and would increase with inflation.

The products will be sold for 4 years. If the project is undertaken, it must be continued for the entire 4 years. The firm believes it could sell 500,000 units per year

The equipment would be depreciated over using straight-line depreciation. The estimated market value of the equipment at the end of the projects 4-year life is $500,000. The federal-plus-state tax rate is 40%. Its cost of capital is 10%.

Do parts a-e in Excel

a.) find the projects NPV, IRR, and payback. .

Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables values at least 5%, 10%, and 20% above and below their base-case values. Include a graph in your analysis. To which variable does NPV appear most sensitive? (Suggestions: Use Excels Data Table feature, or re-calculate the NPV of each input level and then copy and paste the results).
Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Suppose the average CV of this company's projects is 2.0. Is this project more or less risky than the average project for this company?).
Set up your own numerical example of a real option. You can choose either a timing or an abandonment option. Use any probabilities and cash flows that make sense.