Superstar Surfboards is planning on introducing a new Laird Hamilton line of surfboards.The boards will sell for $900 each with a variable cost of $400 per board.A recent marketing study, which cost $250,000, indicates that Superstar should be able to sell 35,000 of these boards each year for the next five years.

Other relevant information includes the following:

Fixed costs $7,500,000 per year

New plant/equipment $15,000,000 to be depreciated on a straight line basis over the 5 years and with zero expected scrap value. Assume that the annual depreciation is tax-deductible and in the year in which it is charged to the firms income statement.

Tax rate 35%

Cost of capital 12%

REQUIRED:

Firstly, calculate the payback period, the net present value and the IRR of the proposed project.

Secondly, assuming that you believe the sales predictions may be +/- 15%, what are your best and worst case NPVs?

Finally, how sensitive is NPV to changes in the sales price?To changes in the number of boards sold?

Present your calculations in the form of a Business Report for the firms marketing director and be sure to include all of your workings.