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Suppose the VP of Baldwin Company is looking to evaluate a new project to produce bowling balls. Here are the relevant details: The cost of
Suppose the VP of Baldwin Company is looking to evaluate a new project to produce bowling balls. Here are the relevant details:
The cost of the marketing test is $
The new product will be manufactured in a building owned by the company. If not
manufactured, the building would be sold for $The cost of the machine is $ and is expected to be used for years, after which
it is expected to be sold for $The price of a unit of production is $ and it is expected to grow at a rate of per year. The tax rate is and the production cost is $ per unit, which is expected to grow
at a rate of per year. Depreciation is calculated using the Modified Accelerated Cost Recovery System. Net working capital at the time of the investment is $ and in subsequent years, it is expected to be of the total expected sales.
The marketing test concluded that the expected production levels for the next years are: EQuantity Demanded; ; ; ;
Questions:
A What is the NPV of the project? Should Baldwin undertake the project?
B Represent of a YX axes the NPV profile of the project. What is the maximum level of the opportunity cost of capital for the project that guarantees a positive NPV
C Perform Sensitivity Analysis on this project focusing on the inputs that you consider most important for a manager to be aware of Report the results in a Table and a Tornado Chart.
D Perform Scenario Analysis on the project with uncertainty on the same inputs. Please clarify the assumptions you are making about the comovement between inputs and provide a justification for these assumptions.
E The manager is scared that a recession may arrive in the next years. Perform a NPV BEA analysis. Should be the manager by a sudden drop in the sales?
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