Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of $102 each, and the company analysts performing the analysis expect that the firm can sell 100 000 units per year at this price for a period of five years, after which time they expect demand for the product to end as a result of new technology. In addition, variable costs are expected to be $19 per unit and fixed costs, not includingdepreciation, are forecast to be$1,010,000 per year. To manufacture this product, Blinkeria will need to buy a computerized production machine for $10.6 million that has no residual or salvage value, and will have an expected life of five years. In addition, the firm expects it will have to invest an additional $305,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided here.

Initial cost of the machine $10,600,000 Expected life 5 years Salvage value of the machine $0 Working capital requirement $305,000 Depreciation method straight line Depreciation expense $2,120,000 per year Cash fixed costsexcluding depreciation $1,010,000 per year Variable costs per unit $19 Required rate of return or cost of capital 9.2% Tax rate 34%

d.Determine the sensitivity of the project's NPV to a(n) 9 percent increase in the variable cost per unit.

e.Determine the sensitivity of the project's NPV to a(n) 9 percent increase in the annual fixed operating costs.

f.Use scenario analysis to evaluate the project's NPV underworst- and best-case scenarios for the project's value drivers.

Expected or Base Case Worst Case Best Case Unit sales 100,000 68,000 132,000 Price per unit $102 $90.78 $121.38 Variable cost per unit $(19) $(20.52) $(17.29) Cash fixed costs per year $(1,010,000) $(1,222,100) $(898,900) Depreciation expense $(2,120,000) $(2,120,000) $(2,120,000)