Company X projects numbers of unit sales for a new project as follows: 81,000 (year 1), 89,000 (year 2), 97,000 (year 3), 92,000 (year 4), and 77,000 (year 5). The project will require $1,500,000 in net working capital to start (year 0) and require net working capital investments each year equal to 15% of the projected sales for subsequent years (year 1-5). NWC is recovered at the end of the fifth year. Fixed costs (operating expenses) are $1,850,000 per year. Variable costs are $190/unit, and the units are priced at $345 each. The equipment needed to begin production has a cost of $19,500,000. The equipment is qualified for accounting as MACRS depreciation: Year 1: 14.29%, Year 2: 24.49%, Year 3: 17.49%, Year 4: 12.49%, Year 5: 8.93% In 5 years, this equipment can be sold for 35% of its acquisition cost (original cost) The company is in the 35% marginal tax bracket and has a required rate of return of 18%. (a) Estimate FCF for each year (b) Calculate NPV, IRR based on the estimated FCF from part a (c) Create a NPV profile corresponding to discount rates between (6%, 8%, ... 40%) (d) Do a sensitivity analysis using 2-input data table analyzing NPV given Selling price ($300, $320,...$400), and VC ($160, $170, ...$210) (e) Do a scenario analysis (optimistic and pessimistic and report the summary results for NPV and IRR: Optimistic case: Variable cost= $160/unit, Fixed cost=$1,600,000, selling price= $400/unit Pessimistic case: Variable cost= $210/unit, Fixed cost= $2,050,000, selling price= $300/unit Company X projects numbers of unit sales for a new project as follows: 81,000 (year 1), 89,000 (year 2), 97,000 (year 3), 92,000 (year 4), and 77,000 (year 5). The project will require $1,500,000 in net working capital to start (year 0) and require net working capital investments each year equal to 15% of the projected sales for subsequent years (year 1-5). NWC is recovered at the end of the fifth year. Fixed costs (operating expenses) are $1,850,000 per year. Variable costs are $190/unit, and the units are priced at $345 each. The equipment needed to begin production has a cost of $19,500,000. The equipment is qualified for accounting as MACRS depreciation: Year 1: 14.29%, Year 2: 24.49%, Year 3: 17.49%, Year 4: 12.49%, Year 5: 8.93% In 5 years, this equipment can be sold for 35% of its acquisition cost (original cost) The company is in the 35% marginal tax bracket and has a required rate of return of 18%. (a) Estimate FCF for each year (b) Calculate NPV, IRR based on the estimated FCF from part a (c) Create a NPV profile corresponding to discount rates between (6%, 8%, ... 40%) (d) Do a sensitivity analysis using 2-input data table analyzing NPV given Selling price ($300, $320,...$400), and VC ($160, $170, ...$210) (e) Do a scenario analysis (optimistic and pessimistic and report the summary results for NPV and IRR: Optimistic case: Variable cost= $160/unit, Fixed cost=$1,600,000, selling price= $400/unit Pessimistic case: Variable cost= $210/unit, Fixed cost= $2,050,000, selling price= $300/unit
