Suppose you are working as Finance Manager for PHP Group, and they have asked you to conduct a sensitivity analysis for a motorcycle project. Already the group has taken significant debt and PHP group is evaluating the investment proposal for a new motorcycle factory. PHP thinks that they can sell 6,000 units per year at a price of $1,000 each. The motorcycle business is very volatile and depends on the economic condition of the country. PHP will have to invest $1,150,000 in net working capital at the start. Variable costs will be $400 per unit, and the project should have a four- year life. The tax rate is 34%. After year one, net working capital requirements will be 25 percent of sales and the same amount will continue till the end of the project. Fixed costs for the project will be $450,000 per year. Cyclical nature of business, uncertainty of fuel prices, technology, Environment, and slow pace of liberalization can affect the PHP groups business. Further, PHP will need to invest a total of $1,250,000 in manufacturing equipment. PHP will recover 80% of the working capital after closing this factory. After four years, the manufacturing equipment will be worth about half of what PHP paid for it. The annual depreciation expense is provided below: Year 1 Year 2 Year 3 Year 4 178,625 306,125 218,625 156,125

Should PHP invest in this project if the discount rate is 20%. Conduct sensitivity analysis with a discount rate of 12%. Show detailed calculation.