Sunlight Inc. is considering a new project. In order to undertake the new project Sunlight Inc. would need to purchase a new machine. The machine will cost $$8,200,000.$ The machine will be used for the project and the project will run for $5$ years. The expected salvage value of the machine at the end of the project is $$1,500,000.$ The machine will be used to produce widgets. The manufacturing department has forecasted that the company will be able to sell $330,000$ widgets per year. The manufacturing department believes that the company will be able to charge $$38$ per widget. The variable costs per widget are expected to be $$23.$ The company believes that the project will require an initial investment in operating net working capital of $$230,000.$ Thereafter, operating net working capital will increase by $$30,000$ per year to the end of the project.

The Executive Vice President will be in charge of this new project. He earns a salary of $$360,000$ per year. The CEO expects the Executive Vice President to spend half of his time over seeing the project. Even if the company does not do the new project, the Executive Vice President will remain with the company and continue to earn his salary of $$360,000.$ If the company does the project, it will need to hire a project manager. The project manager will earn a salary of $$150,000$ per year during the life of the project.

When doing your analysis, assume that the asset class remains open, and that the half$-$year rule applies.

The CCA rate is $30\%,$ the tax rate is $40\%,$ and the required rate of return $($cost of capital$)$ is $10\%.$

a$)$ Based on the NPV rule, determine if the company should purchase the new machine.

b$)$ Your boss has a number of concerns regarding the project. Therefore, she has asked you to determine the number of units that the company must sell each year for the NPV to be greater than zero.

c$)$ Your boss has also asked you to determine which input $-$ units sold, price per unit, variable cost per unit, or fixed cost $($project manager$$s salary$)-$ has the greatest forecasting risk. Therefore, your boss has asked you to do a sensitivity analysis. Your boss wants you to vary the input forecast by $1\%$ to reflect a more pessimistic outcome for each input, then determine the impact on the NPV of the project. Based on this analysis, determine which input has the greatest forecasting risk.

d$)$ Finally, your boss has asked you to perform a scenario analysis. Therefore, your boss has asked to include two new scenarios. A pessimistic scenario and an optimistic scenario. Your boss wishes to know the NPV of the project under these two additional scenarios. The value of the inputs for each scenario are shown in the table below.

Pessimistic Optimistic

Units sold $200,000520,000$

Price per unit $$31$ $$54$

Variable cost per unit $$25$ $$19$

Project Manager$$s Salary $$175,000$ $$125,000$

Salvage Value $$500,000$ $$2,000,000$