Bubba Golf is considering manufacturing a new 'super-sized' golf club to compete with the

successful debut of the Holywood Smasher, produced by Koepka Industries. The initial investment

for this project would include $3.0 million in new machinery and an additional $240,000 in

setup costs. (The amount to be capitalized and then depreciated is the sum of the machinery and

setup costs.) The project life would be 4 years; however, in accordance with the IRS, the depreciation

method would be 5-year MACRS. (See page 4 for a MACRS schedule.) The relevant required

return is 14% and the applicable tax rate is 34%. For simplicity, assume that a $600,000

investment in NWC is required immediately (to be recovered at the project's end) and the assets

involved would have a salvage value of $108,000 (before any tax-expense implications) at the

end of 4 years. At the end of this problem statement, you'll find year-1 projections* that reflect

the best estimates from the marketing and engineering teams.

(a) (5 pts.) Conduct a scenario analysis to calculate net present value (NPV) for each of the three

scenarios specified. Please create (and submit) only one worksheet that can be generalized across

all cases, as opposed to creating three different worksheets for all scenarios. Make a note of all

three NPVs to be used in part b. Then, leave your single worksheet with the Most Likely Scenario

values as the inputs.

(b) (3 pts.) What is the expected (i.e. probability-weighted) NPV? For part b, tabulate all three scenario-specific NPVs and also shows the overarching expected NPV calculation. This worksheet should not contain your entire cash flow worksheet; it should be very succinct.

(c) (3 pts.) Now, return to your master spreadsheet and conduct a sensitivity analysis on sales (#

units), price per unit, variable costs, and fixed production costs. Specifically, calculate the dollar

change in NPV, given a 10% increase in the input variable from its base-case (most-likely)

value. For example, hold all input variables constant, increase sales to 44,000 units, calculate the

new NPV, and report the dollar change in NPV and percent change in NPV for a 10% increase in

sales. Next, again hold all input variables constant, increase price per unit to $363.00, calculate

the new NPV, and report the dollar change and percent change in NPV for a 10% increase in

selling price per unit. Do the same for the other two input variables and summarize the work. This analysis will show NPV's sensitivity to changes in the various input

variables. Finally, in order from most to least critical, indicate which inputs should perhaps be

revisited to ensure that it's been forecasted accurately.

Pessimistic Most Likely Optimistic

Sales (in units) 35,000 40,000 45,000

Price per unit $290 $330 $370

Variable costs (per unit) $206 $198 $190

Fixed Production costs $2,100,000 $1,800,000 $1,500,000

Probability of outcome 30% 50% 20%

*For simplicity, assume that the state which is realized at t=1 will be in effect for the project's duration.

Answer rating: 100% (QA)

To solve this problem we will create a single worksheet to calculate the net present value NPV for each scenario and then determine the expected NPV W... View the full answer