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GG Corp is considering the manufacture of a new chemical compound. An investment of $ 4 million in plant and equipment is required. The firm

GG Corp is considering the manufacture of a new chemical compound. An investment of $4
million in plant and equipment is required. The firm estimates that the investment will have a 5
year life, and will use straight-line depreciation towards a zero salvage value (depreciating full
amount). However, the investment has an anticipated salvage value equal to 10% of its original
costs. Estimated Sales Volume is estimated to be 1.8 million units and grow annually at 10%.
Selling price per unit is expected to be $2 in year 1, and expected to increase by 5% each year.
GG estimates that it will incur additional fixed operating expenses of $1 million per year and
variable operating expenses equal to 45% of total revenue. GG estimates that it will need to
invest 400,000 in net working capital at the start of the project (year 0). All net working capital
will be recouped at the end of the project. Tax rate is 21%, and requires a 15% rate of return.
1A. What is the NPV and IRR of this Project?
1B. What is the break-even sensitivity analysis for the following inputs (sales growth, initial sales
estimate, price per unit growth rate, variable operating expenses, and tax rate)? From the
analysis performed in 1B, which variables are the most risky from a capital budgeting
perspective?

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