Pappas Lamp is considering the manufacture of a new lamp. Equipment necessary for production will cost $9 million and it will be depreciated on a straight-line basis over the eight-year life. The salvage value is estimated to be $1 million at the end of eight years. The lamp will retail for $95. The company expects to sell 150,000 lamps per year. Fixed costs will be $1,000,000 per year and variable costs are $30 per lamp. Production will require an investment in net working capital of $700,000. The tax rate is 30 percent.

a) Perform a scenario analysis using 7 percent, 15 percent, and 25 percent cost of capital. Calculate IRR and NPV for each case.

b) Conduct sensitivity analysis using sales price and variable costs. (See how NPV is changing when you change the sales numbers and variable cost)