Discount rate is 10.5%
Page 6 of 9 Case Study: Your team is working for a famous drone producer, which is considering a new investment project. In the new project, the company will launch a new model of safer and faster delivery drones that can boost the sales by at least 35%. The new project is expected to generate an annual sale of 4,500 drones for an average price of $3,250 per unit for 5 years. The new investment project requires your company to buy a new assembly line with initial cost of $2,750,000, a residual value of $350,000 at the end of the project. The company will need to add $450 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line Variable cost per unit: $875 Cash fixed costs per year: $250,000 Corporate marginal tax: 30% Discount rate: xxx% (discount rate to be provided later) Your Finance Department conducted some economics forecast and estimated that in the coming years, lifted Covid-19 pandemic restrictions, more expensive labour costs and recovering of in person delivery services can result in negative changes of the project value drivers. You team decides to perform a risk analysis to determine the sensitivity of the project's NPV. Required: Perform an NPV sensitivity analysis with the following changes in estimated value drivers of the project. You need to provide your results in (a) relevant tables: Price per unit decreases by 15% Sales decrease by 15% Variable cost per unit increases by 15% Cash fixed cost per year increased by 15% Based on the sensitivity analysis outcome, draw relevant conclusion about project NPV's sensitivity. Note: Each group will work with different discount rate. Students are required to attend interactive tutorial class in week 9 to know discount rate assigned to your group. This information will not be available in week 9 tutorial solution. Conclusion Summarize / Reflection the outcomes of your group's works (not more than 150 words) Page 6 of 9 Case Study: Your team is working for a famous drone producer, which is considering a new investment project. In the new project, the company will launch a new model of safer and faster delivery drones that can boost the sales by at least 35%. The new project is expected to generate an annual sale of 4,500 drones for an average price of $3,250 per unit for 5 years. The new investment project requires your company to buy a new assembly line with initial cost of $2,750,000, a residual value of $350,000 at the end of the project. The company will need to add $450 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line Variable cost per unit: $875 Cash fixed costs per year: $250,000 Corporate marginal tax: 30% Discount rate: xxx% (discount rate to be provided later) Your Finance Department conducted some economics forecast and estimated that in the coming years, lifted Covid-19 pandemic restrictions, more expensive labour costs and recovering of in person delivery services can result in negative changes of the project value drivers. You team decides to perform a risk analysis to determine the sensitivity of the project's NPV. Required: Perform an NPV sensitivity analysis with the following changes in estimated value drivers of the project. You need to provide your results in (a) relevant tables: Price per unit decreases by 15% Sales decrease by 15% Variable cost per unit increases by 15% Cash fixed cost per year increased by 15% Based on the sensitivity analysis outcome, draw relevant conclusion about project NPV's sensitivity. Note: Each group will work with different discount rate. Students are required to attend interactive tutorial class in week 9 to know discount rate assigned to your group. This information will not be available in week 9 tutorial solution. Conclusion Summarize / Reflection the outcomes of your group's works (not more than 150 words)
