(Related to Checkpoint 13.2 and Checkpoint 13.3) (Comprehensive risk analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of $105 each, and the company analysts performing the analysis expect that the firm can sell 101,000 units per year at this price for a period of five years, after which time they expect demand for the product to end as a result of new technology. In addition, variable costs are expected to be $22 per unit and fixed costs, not including depreciation, are forecast to be $1,040,000 per year. To manufacture this product, Blinkeria will need to buy a computerized production machine for $10.7 million that has no residual or salvage value, and will have an expected life of five years. In addition, the firm expects it will have to invest an additional $308,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided here: 5 a. Calculate the project's NPV. b. Determine the sensitivity of the project's NPV to a(n) 9 percent decrease in the number of units sold. c. Determine the sensitivity of the project's NPV to a(n) 9 percent decrease in the price per unit. d. Determine the sensitivity of the project's NPV to a(n) 9 percent increase in variable cost per unit. e. Determine the sensitivity of the project's NPV to a(n) 9 percent increase in the annual fixed operating costs. f. Use scenario analysis to evaluate the project's NPV under worst- and best-case scenarios for the project's value drivers. The values for the expected or base-case along with the worst- and best-case scenarios are listed here: 2 O Initial cost of the machine Expected life Salvage value of the machine Working capital requirement Depreciation method Depreciation expense Cash fixed costs-excluding depreciation Variable costs per unit Required rate of return or cost of capital Tax rate $10,700,000 5 years $0 $308,000 straight line $2,140,000 per year $1,040,000 per year $22 9.9% 34% Unit sales Price per unit Variable cost per unit Cash fixed costs per year Depreciation expense Expected or Base Case 101,000 $105 $(22) $(1,040,000) $(2,140,000) Worst Case 68,680 $96.60 $(23.98) $(1,268,800) $(2,140,000) Best Case 133,320 $127.05 $(20.24) $(936,000) $(2,140,000) (Related to Checkpoint 13.2 and Checkpoint 13.3) (Comprehensive risk analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of $105 each, and the company analysts performing the analysis expect that the firm can sell 101,000 units per year at this price for a period of five years, after which time they expect demand for the product to end as a result of new technology. In addition, variable costs are expected to be $22 per unit and fixed costs, not including depreciation, are forecast to be $1,040,000 per year. To manufacture this product, Blinkeria will need to buy a computerized production machine for $10.7 million that has no residual or salvage value, and will have an expected life of five years. In addition, the firm expects it will have to invest an additional $308,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided here: 5 a. Calculate the project's NPV. b. Determine the sensitivity of the project's NPV to a(n) 9 percent decrease in the number of units sold. c. Determine the sensitivity of the project's NPV to a(n) 9 percent decrease in the price per unit. d. Determine the sensitivity of the project's NPV to a(n) 9 percent increase in variable cost per unit. e. Determine the sensitivity of the project's NPV to a(n) 9 percent increase in the annual fixed operating costs. f. Use scenario analysis to evaluate the project's NPV under worst- and best-case scenarios for the project's value drivers. The values for the expected or base-case along with the worst- and best-case scenarios are listed here: 2 O Initial cost of the machine Expected life Salvage value of the machine Working capital requirement Depreciation method Depreciation expense Cash fixed costs-excluding depreciation Variable costs per unit Required rate of return or cost of capital Tax rate $10,700,000 5 years $0 $308,000 straight line $2,140,000 per year $1,040,000 per year $22 9.9% 34% Unit sales Price per unit Variable cost per unit Cash fixed costs per year Depreciation expense Expected or Base Case 101,000 $105 $(22) $(1,040,000) $(2,140,000) Worst Case 68,680 $96.60 $(23.98) $(1,268,800) $(2,140,000) Best Case 133,320 $127.05 $(20.24) $(936,000) $(2,140,000)