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 projects 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, youll 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 Assignment 3, p.4 (5, continued) all cases, as opposed to creating three different worksheets for the three scenarios. Then, change only the input cells as you go from scenario to scenario. Make a record of all three NPVs to be used in part b. Then, before you submit, be sure to leave your single worksheet with the Most Likely Scenario values in the input cells. (b) (3 pts.) What is the expected (i.e. probability-weighted) NPV? For part b, please create a separate worksheet that tabulates 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. [Answer: 3,721,709] (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 create a brief table that summarizes the work. This analysis will show NPVs 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 its 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%