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%.

B). 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).