Case Study: Assume that are the financial manager of a company, which is considering a
potential project with a new product that is expected to sell for an average price of $22 per
unit and the company expects it can sell 350 000 unit per year at this price for a period of 4
years. Launching this project will require purchase of a $2 000 000 equipment that has
residual value in four years of $200 000 and adding $ 600 000 in working capital which is
expected to be fully retrieved at the end of the project. Other information is available below:
Depreciation method: straight line
Variable cost per unit: $11
Cash fixed costs per year $350 000
Discount rate: 10%
Tax Rate: 30%
Do an analysis with cash flows of the project to determine the sensitivity of the project NPV
with the following changes in the value drivers and provide your results in (a) relevant
tables:
Unit sales decrease by 10%
Price per unit decreases by 10%
Variable cost per unit increases 10%
Cash fixed cost per year increases by 10%

Explanation:

The calculation can be done using sensitivity analysis

The sensitivity analysis is done as follows:

ScenarioNPVDeviation in NPV from orignial scenario% depletion

Original6140513

Unit sale decreases by 10%5286234-85427913.91%

Price per unit decreases by 10%2894254-324625952.87%

Variable cost per unit increases 10%5286234-85427913.91%

Cash fixed cost per year increases by 10%6062851-776621.26%

Calculation of original NPV

Sales (350000 * 22)7700000

Less: Variable cost (350000 * 11)-3850000

Less: Fixed cost-350000

Less: Depreciation [(2000000 - 200000) / 4]-450000

Profit before tax3050000

Less: Tax at 30%-915000

Profit after tax2135000

Add: Depreciation450000

Cash flow after tax2585000

01234

Initial investment-2000000

Working capital-600000

Cash flow after tax 2585000258500025850002585000

Working capital released 600000

Residual value 200000

Net cash flows-26000002585000258500025850003385000

PVF at 10%10.90910.82640.75130.6830

Present value-26000002350000213636419421492312001

NPV 6140513

Calculation of NPV when unit sales decrease by 10%

Sales (315000 * 22)6930000

Less: Variable cost (315000 * 11)-3465000

Less: Fixed cost-350000

Less: Depreciation [(2000000 - 200000) / 4]-450000

Profit before tax2665000

Less: Tax at 30%-799500

Profit after tax1865500

Add: Depreciation450000

Cash flow after tax2315500

01234

Initial investment-2000000

Working capital-600000

Cash flow after tax 2315500231550023155002315500

Working capital released 600000

Residual value 200000

Net cash flows-26000002315500231550023155003115500

PVF at 10%10.90910.82640.75130.6830

Present value-26000002105000191363617396692127928

NPV 5286234

Calculation of NPV when price per unit decrease by 10%

Sales (350000 * 19.8)6237000

Less: Variable cost (350000 * 11)-3850000

Less: Fixed cost-350000

Less: Depreciation [(2000000 - 200000) / 4]-450000

Profit before tax1587000

Less: Tax at 30%-476100

Profit after tax1110900

Add: Depreciation450000

Cash flow after tax1560900

01234

Initial investment-2000000

Working capital-600000

Cash flow after tax 1560900156090015609001560900

Working capital released 600000

Residual value 200000

Net cash flows-26000001560900156090015609002360900

PVF at 10%10.90910.82640.75130.6830

Present value-26000001419000129000011727271612526

NPV 2894254

Calculation of NPV when variable cost per unit increases 10%

Sales (350000 * 22)7700000

Less: Variable cost (350000 * 12.1)-4235000

Less: Fixed cost-350000

Less: Depreciation [(2000000 - 200000) / 4]-450000

Profit before tax2665000

Less: Tax at 30%-799500

Profit after tax1865500

Add: Depreciation450000

Cash flow after tax2315500

01234

Initial investment-2000000

Working capital-600000

Cash flow after tax 2315500231550023155002315500

Working capital released 600000

Residual value 200000

Net cash flows-26000002315500231550023155003115500

PVF at 10%10.90910.82640.75130.6830

Present value-26000002105000191363617396692127928

NPV 5286234

Calculation of NPV when cash fixed cost per year increases by 10%

Sales (350000 * 22)7700000

Less: Variable cost (350000 * 11)-3850000

Less: Fixed cost-385000

Less: Depreciation [(2000000 - 200000) / 4]-450000

Profit before tax3015000

Less: Tax 30%-904500

Profit after tax2110500

Add: Depreciation450000

Cash flow after tax2560500

01234

Initial investment-2000000

Working capital-600000

Cash flow after tax 2560500256050025605002560500

Working capital released 600000

Residual value 200000

Net cash flows-26000002560500256050025605003360500

PVF at 10%10.90910.82640.75130.6830

Present value-26000002327727211611619237422295267

NPV 6062851

answer; i believe that (pastoral society) is the correct answer;

answerindustrial revolution;