NEW PROJECT ANALYSIS You must analyze a potential new producta caulking com- pound that Cory Materials R&D people developed for use in the residential construction industry. Corys marketing manager thinks the company can sell 115,000 tubes per year at a price of $3 25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1 95, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. (Refer to Appendix 12A for MACRS depre- ciation rates.) When production ceases after 3 years, the equipment should have a market value of $15,000. Corys tax rate is 40%, and it uses a 10% WACC for average-risk projects.

g. The CEO expressed concern that some of the base-case inputs for the caulking com- pound might be too optimistic or too pessimistic, and he wants to know how the NPV would be affected if these six variables were 20% above or 20% below the base-case levels: unit sales, sales price, variable cost, fixed costs, WACC, and equipment cost. Hold other things constant when you consider each variable and construct a sensitivity graph to illustrate your results.

h. Do a scenario analysis based on the assumption that there is a 25% probability that each of the six variables itemized in part g will turn out to have their best-case values as calculated in part g, a 50% probability that all will have their base-case values, and a 25% probability that all will have their worst-case values. The other variables remain at base-case levels. Calculate the expected NPV, the standard deviation of NPV, and the coefficient of variation.