A proposal to build a $199 million factory is being contemplated to produce a new product. The factory is expected to last 30 years (but can be depreciated immediately according to current accounting rules). The factory is expected to produce 8000 units per year that are expected to be sold for a price of $24,000 each. Variable costs (production labor, raw materials, marketing, distribution, etc.) are expected to be $18,000 per unit. Fixed costs (administration, maintenance, repairs, utliities, insurance, real estate taxes, etc.) are expected to be $19 million per year. The tax rate is 21%. The project will require $28 million in inventory (raw materials and finished products) as well as $40 million in receivables (credit for customers). An extra $9 million in cash is required as a safety stock to provide financial flexibility (that enables avoiding running out of cash in case of temporary declines in demand). Suppliers (companies which sell the parts and raw materials that are used in the production of the 8000 units produced by the factory) are expected to provide short-term trade credit that is expected to sum to $24 million in accounts payable CAPM: 7.196%

1 Assuming no new equity capital needs to be raised, compute the NPV if demand is only half of the projected 8000 units per year

2 Assuming no new equity capital needs to be raised, compute the NPV if variable costs go up 10% (but sales and fixed costs remain the same)

3. Compute the sensitivity of NPV to a change in unit sales

4. Assuming no new equity capital needs to be raised, compute the minimum sales price per unit to get an NPV of at least $0

5. Assuming no new equity capital needs to be raised, compute the NPV if prices and all costs were expected to rise by 2.5% per year due to expected inflation (helpful hint: use the growing annuity formula for the annual after-tax cash flow; or you could use the equation for real cash flow valuation that involves discounting the cash flows unadjusted for inflation by the cost of equity minus the inflation rate)

6 Assume that, if you undertake the project, you can alternatively install a different energy system that is more environmentally friendly energy system (e.g., solar or fuel cells) that requires an incremental investment of $19 million and is expected to lead to incrementally higher energy costs for a while (reducing after-tax cash flows by $3 million per year for the first 4 years of the project) but result in incrementally lower energy costs thereafter (increasing after-tax cash flows by $8 million per year from year 5 through year 20 of the project). Compute the incremental NPV of this alternative energy system .