Candy maker DM Sweets recently hired you as an assistant to the CFO. Your first task is evaluating whether DM should expand by developing a new pastry line. Your research reflects the following information: Given how consumer preferences evolve over time, you expect the proposed project to span the next five years. Current estimates indicate sales will be 2 million units in year one with 25% sales growth over the following 2 years and 5% growth in the final 2 years. The unit price in Year 1 is $2. Given estimated demand, prices are expected to rise by 3% each subsequent year. The project requires purchasing new equipment worth $2.5 million, after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $350,000 when the project ends. As a result of the project, current assets would increase by $450,000, and payables would increase by $150,000. The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% in each successive year. Variable costs are estimated to be 65% of sales revenue, fixed costs excluding depreciation are estimated at $750,000 per year, the state-plus-federal tax rate is 25%, and the corporation's cost of capital is 8%. Suppose you are not very confident in your estimates for unit sales. To gauge the impact of a wrong estimate, you analyze the sensitivity of NPV to different sales projections. Specifically, you calculate how NPV changes if your initial sales estimates are +10%, +20%, and +30% above your initial estimates. Construct a table that shows the sensitivity analysis. Comment on whether/how this affects the decision to implement the project. Candy maker DM Sweets recently hired you as an assistant to the CFO. Your first task is evaluating whether DM should expand by developing a new pastry line. Your research reflects the following information: Given how consumer preferences evolve over time, you expect the proposed project to span the next five years. Current estimates indicate sales will be 2 million units in year one with 25% sales growth over the following 2 years and 5% growth in the final 2 years. The unit price in Year 1 is $2. Given estimated demand, prices are expected to rise by 3% each subsequent year. The project requires purchasing new equipment worth $2.5 million, after installation. The new equipment is state-of-the-art, so you expect to be able to sell it for $350,000 when the project ends. As a result of the project, current assets would increase by $450,000, and payables would increase by $150,000. The new equipment falls into the MACRS 7-year class, so the applicable rates are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46% in each successive year. Variable costs are estimated to be 65% of sales revenue, fixed costs excluding depreciation are estimated at $750,000 per year, the state-plus-federal tax rate is 25%, and the corporation's cost of capital is 8%. Suppose you are not very confident in your estimates for unit sales. To gauge the impact of a wrong estimate, you analyze the sensitivity of NPV to different sales projections. Specifically, you calculate how NPV changes if your initial sales estimates are +10%, +20%, and +30% above your initial estimates. Construct a table that shows the sensitivity analysis. Comment on whether/how this affects the decision to implement the project
