JD Sdn Bhd has developed a new industrial detergent that can be used in motor

vehicle garages. It would cost RM$1$ million to buy the equipment necessary to manufacture

the blenders, and initially, it would require net operating working capital equal to $15\%$ of the

$1$st year sales amount. Net operating working capital will remain at the same rate. The

project would have a life of $5$ years. If the project is undertaken, it must be continued for the

entire $5$ years.

The firm believes it could sell $100,000$ units per year. The detergents would sell for RM$12$ per unit.

After the first year, JD intends to increase the sales price by $3\%$ annually.

The variable cost is RM$5$ per unit and will increase at an inflation rate of $3\%.$ The

company$$s fixed costs would be RM$420,000$ at Year $1$ and would also increase at a rate of $3\%$

annually.

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 project$$s $5-$year life of RM$200,000.$ The company, however, estimated the machine

can be sold as scrap for RM$250,000.$ The corporate tax rate is $25\%.$

The cost of capital is $12\%.$

a$.$ Develop a spreadsheet model and use it to find the project$$s NPV$,$ IRR, and payback.

b$.$ 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 $10\%$ above and $10\%$ below their base$-$case values. Include a graph in

your analysis.

c$.$ Conduct a scenario analysis. Assume that the best$-$case condition is with no increase in the

sales price, a $5\%$ increase in the number of units sold, and a $3\%$ decrease in the variable cost

per unit. All other variables remain the same. For the worst$-$case condition, there will be a $5\%$

decrease in units sold, a $2\%$ decrease in unit price and a $3\%$ increase in the variable cost per

unit. 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

project$$s coefficient of variation NPV$.$

d$.$ On the basis of your analysis, would you recommend that the project be accepted? What

added advise and special attention would you give to the company with regard to the

project