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Sensitivity Analysis: Use the following information to answer questions 5, 6, 7, and 8, below: A three-year project requires an initial investment (i.e., at t=0)
Sensitivity Analysis: Use the following information to answer questions 5, 6, 7, and 8, below: A three-year project requires an initial investment (i.e., at t=0) in equipment of $100,000. At t=3, the company plans to sell the equipment for $10,000. The equipment can be depreciated according to the three year schedule, which allows depreciation of 33.33% at t=1, 44.45% at t-2, 14.81% at t-3, and 7.41% at t=4. Depreciation will be based solely on the initial cost of the equipment (i.e., when calculating depreciation, ignore any salvage value) This project is expected to produce sales revenue of $400,000 per year for each of the three years of the project (i.e., sales revenue will be $400,000 for t=1, t-2, and t-3) Manufacturing costs are estimated to be $300,000 per year, The corporate tax rate is 35%. The company's tax situation is such that it can make use of all applicable tax shields and deductions. The opportunity cost of capital is 20% 5. Calculate the Net Present Value (NPV) of the project. 6. How will the project NPV change if the revenue is 20% higher than estimated? How will the project NPV change if the revenue is 20% lower than estimated? 7. How will the project NPV change if the manufacturing costs are 10% higher than estimated? How will the project NPV change if the manufacturing costs are 10% lower than estimated? 8. Based on your answers to questions 5, 6, and 7, prepare a sensitivity table for this project. Is the project decision to accept or reject more sensitive to the revenue estimate or to the cost estimate
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