Risk analysis and project evaluation

Assume that are the financial manager of a company, which is considering a potential project with a new product that is expected to sell for an average price of $22 per unit and the company expects it can sell 350 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a $2 000 000 equipment that has residual value in four years of $200 000 and adding $ 600 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:

Initial investment 2,000,000

Product life 4 years

Residual value 200,000

Working capital 600,000

Depreciation method Straight line

Depreciation expense (2.0 mil - 0.2):4 = 450,000

Unit sales 350,000 per year

Unit price 22

Variable cost per unit 11

Cash fixed cost per year 350,000 per year

Discount rate 10%

Tax rate 30%

Execute an analysis with cash flows of the project to determine the sensitivity of the project NPV with the following changes in the value drivers and provide your results in (a) relevant table:

Required:

• Cash fixed cost per year increases by 10%