Suppose you want to launch a new business. Starting the business would necessitate an initial equipment purchase of $6.75 million. Additionally, you have previously received a market analysis study from Marzofka Marketing that cost $120,000. You also have already paid a friend $10,000 to design your website and logo. You are projecting this project for the next 10 years and are using the MACRS 10 year depreciation schedule (fully depreciating the equipment according to the schedule). Your market analysis along with your own projections/requirements showed the following: In your first year you would sell 560,000 units The price in the 1st year would be $3.85 Your unit COGS would be 35% of the sales price Annual overhead would cost $425,000 You would require an initial net working capital (NWC) investment of $150,000 You assume a tax rate of 25% You also assume you will be able to sell the equipment for $600,000 at the end of the project in 10 years. Unit sales (after the first year) are expected to grow 8% per year You should also be able to increase prices by 2.5% each year Each year you will have to increase NWC by 5% of the expected change in sales (so NWC investment in year 1 is based on the expected change in sales from year 1 to year 2) All NWC investment is recovered at the end of the project Based on the risk, you need to make a 14% return on this project As you are looking at your projections and those given to you by Marzofka Marketing, which estimate is most crucial to the level of success of the company? Is it initial product price or is it fixed costs or is it the level of initial sales? Demonstrate with a sensitivity analysis (based on the impact of a given percent change in each variable). The original numbers above are your best guess at what will happen. However, suppose you anticipate the following potential issues with your estimates: Your initial number of units sold could be off as much as 10% in either direction Your initial price could be up to 6% off in either direction Unit COGS could be off by as much as 2.5% in either direction Unit sales growth could be 9% higher or lower than the 8% estimated Your estimate of 2.5% annual price increases could be 5% higher or lower The salvage value might be as much as 50% different in either direction The needed NWC investment each year could be 1.2% higher or lower than estimated What is the best case scenario NPV for your company? What is the worst case scenario NPV for your company? Suppose you believe the best case scenario will happen 5% of the time, the worst case scenario will happen 35% of the time and the base case the rest of the time. Should you pursue this project? Explain. Suppose, if the worst case scenario starts to unfold, that you believe you can liquidate the company after 2 years and sell the equipment for $5 million at that time. What is the worst case scenario NPV now? What is the value of the option to abandon? Does the option to abandon change your answer to whether you should pursue the project Explain/show.