Jack Berry, an analyst at a private company named JTL Enterprise, is evaluating a project proposal submitted by one of its staff that could potentially generate real benefit to the company.

The pilot test revealed that such project could produce 340,000 kg per year of a chemical element X over a 7-year period, and a by-product of valuable nature stones about 68 kg per year that worth $7,275 per kg.

JTL is a private company that has total assets of $45 million ($4 million of which is cash). JTL has the capacity to borrow up to $9 million at a cost of 8%. The projected operating cost would be $900,000 per year (fixed cost: $400,000, variable cost: $500,000). The uncertainty of the project would be the initial cost and the market-selling price of the chemical element X. The capital investment for the project could cost $10 million with possible cost overruns of 10% or 15%. For tax purpose, assume that the capital investment could be depreciated using straight-line method over the 7-year period, and the tax rate is 35%.

Meanwhile, there is an alternative way of carrying out the project with a possible capital investment that would be reduced by $1.7 million. However, using this approach, the fixed cost of the projected operating cost would increased to $850,000 per year, result in higher overall operating cost per year.

Regardless, a new government regulation for such project, if passed, would increase the capital investment by another $1.5 million.

The current price of the chemical element X is $10,000 (per 1,000 kg) but the future price is anyones guess. The optimistic estimation is $10,000 (per 1,000 kg) while the pessimistic estimation is only about $7,500 (per 1,000 kg). Jack does not have a strong feeling about the price in either one. His best estimation is that the price will just increase with the inflation, which is about 3.5% per year, and the operating costs would increase with the inflation as well. In the market, similar project such as this requires a minimum nominal rate of return of 14%.

Jack needs to evaluate this project using NPV analysis, starting with the base-case scenario and running sensitivity and break-even analysis under different scenarios as appropriate.

What scenarios or forecast would get Jack worry the most? Where would extra information be most helpful? Is there a case here for delaying the project? Decisions and Decisions?

I need help with the calculations please, thank you.