JD Sdn Bhd has developed a new hand blender that would be used for woodwork and carpentry activities. It would cost RM1 million to buy the equipment necessary to manufacture the blenders, and initially it would require net operating working capital equal to 10% of the 1^st year sales. The project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years. After the first year, JD intends to increase the sales price by 5% annually.

The firm believes it could sell 7,000 units per year. The blenders would sell for RM230 per unit, and JD believes that variable costs would amount to RM175 per unit. The companys fixed costs would be RM120,000 at Year 1 and would increase with inflation at a rate of 4% annually. The variable costs will also increase at the inflation rate of 4%.

The equipment would be depreciated over a 5-year period, using the straight-line method. The annual depreciation will be calculated based on a salvage value of the equipment at the end of the projects 5-year life of RM60,000. The company however estimated the machine can be sold as scrap for RM70,000. The corporate tax rate is 25%.

The projects returns are expected to be highly correlated with returns on the firms other assets. The cost of capital is 10%.

Develop a spreadsheet model and use it to find the projects NPV, IRR, and payback.

Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, number of units sold, the variable costs per unit, fixed costs and the cost of capital. Set these variables values at 20% above and 20% below their base-case values. Include a graph in your analysis.

Conduct a scenario analysis. Assume that the best-case condition is with the sales price increase by 15%, number of units sold 7,200 units, variable costs per unit and fixed cost increase 5% from the base-case value. The worst-case condition, with increase in the variable and fixed cost by 15% and with no change in the unit sales and unit price from the base value. The best-case condition, worst-case condition, and the base case are assumed to have an equal probability. Determine the expected NPV, the standard deviation of the NPV and the projects coefficient of variation NPV.

On the basis of your analysis, would you recommend that the project be accepted? What added advise and special attention would you give for the company with regard to the project?