AcePearl Sdn$.$ Bhd$.$ has developed a new battery operate hand drill. It would cost RM$1,000,000$ to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to $10\%$ of sales in the initial year. The project would have a life of $5$ years. If the project is undertaken, it must be continued for the entire $5$ years.

The firm believes it could sell $6,500$ units per year. The drills would sell for RM$350$ per unit and that variable costs would amount to RM$200$ per unit. The company$$s non$-$variable costs would be RM$125,000$ at Year $1$ and would increase with inflation. After the first year, the sales price and variable costs will increase at the inflation rate of $3\mathrm{.}5\%.$

The equipment would be depreciated over a $5-$year period, using the straight$-$line method. The estimated market value of the equipment at the end of the project$$s $5-$year life is RM$150,000.$ The tax rate is $25\%$

Also, the project$$s returns are expected to be highly correlated with returns on the firm$$s other assets. Its cost of capital is $10\%$ for average$-$risk projects, defined as projects with a coefficient of variation of NPV between $0\mathrm{.}8$ and $1\mathrm{.}2.$ Low$-$risk projects are evaluated with a WACC of $8\%$ and high$-$risk projects at $13\%.$

Question $1($CLO$1)$

Develop a spreadsheet model and use it to find the project$$s NPV$,$ IRR and payback period.

$(35$ Marks$)$

Question $2($CLO$2)$

Conduct sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and the number of units sold. Set these variables$$ values at $10\%$ and $20\%$ above and below their base$-$case values. Include a graph in your analysis.

$(15$ Marks$)$

Question $3($CLO$2)$

Conduct a scenario analysis. Assume that there is a $30\%$ probability that best$-$case conditions, with the sales price, number of units sold, variable costs per unit, and fixed cost being $20\%$ better than its base$-$case value. There is a $30\%$ probability of worse$-$case conditions, with the variable $20\%$ worse than the base value. The base$-$case condition is assumed to have a $40\%$ probability. What would be the project$$s coefficient of variation NPV$?$

$(20$ Marks$)$

Question $4($CLO$2)$

If the project appears to be more or less risky than an average project, find its risk adjusted NPV$,$ IRR, and payback.

$(15$ Marks$)$

Question $5($CLO$3)$

On the basis of information in the problem, would you recommend that the project be accepted?