Wacky Widgets, Incorporated is considering a new three-year expansion project to make new Widgets. It requires an initial fixed investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be sold for $50,000 to a scrapyard. The fixed asset will take 2 years to install, so revenue will begin in year 2.

The project is estimated to generate $2,800,000 in annual sales, with variable costs of 40 percent. There are no fixed costs, and working capital requirements are 5% of annual revenues. The tax rate is 35 percent and the required rate of return is 15 percent. The risk-free rate is 9 percent. Your firm requires a payback period of 3 years to approve a project.

The Widget produced by this product will often go to the same customers as the Bidget, another product produced by Wacky Widgets. They will often be shipped in the same package as another product the firm produces. It will not reduce the overhead on producing Widgets, but it will reduce the cost of shipping Bidgets by $20,000 per year in years 2 - 4.

Now, you are given the following additional information:

Sales may be anywhere from 2.6 million to 2.95 million per year.

Variable costs will be between 38% and 42% of revenues.

The required rate of return is between 14% and 16%.

Your assignment is to:

Conduct a scenario analysis of the best case and the worst case scenario.

Conduct a sensitivity analysis.

Describe what you learned from the sensitivity analysis.

Determine the accounting break-even level of sales (including taxes)

Determine the cash break-even level of sales (including taxes)

Answer the question: Would you approve the project based on what you learned? Why or why not?