Question

given the above results, explain why the firm should or should not invest in the is product line

Recxt 300X Bull X 300 X 300 X t For Sop h ix PHEX PHE X i XC X € 2 C Apps 0 .docs.google.com/spreadsheets/d/1hwGarGtYMD38NJX404YEMSVPONOdf/editngid 1331372980 su portal now - G... 03 Outlook Web App Rookie 2019 Sum.. UMD SGA Gover My Orders Cheg. VitasourceConte. Simulations For Finance Class XLSX File Edit View Insert Format Data Tools Hellcats = - 100% 1 0 0 12 Đề + 1 n dine + B + A + + 00 1 19,000 $ 1,000 $ $10,000,000 $ 2 3 4.000 38,800 1,000 $ 1,000 5 4,000,000 $3,800,000 4 35,000 9505 1,100,000 $ 7 35.500 Terminal 8 35.000 9 3500 5 15.000 903 100,000 $ 6 36.000 9505 4,200,000 $ $ 53,725,000 5 11.500,000 $30,000 $30,000,000 Cost of goods sold $ $ Total cost of poods sold Gronprofits Operating expenses $ 1.500.000 $ 12,000,000 $ 13,500,000 $ 16,500,000 1.500.000 $13.500.000 15,100,000 $1,900,000 $ 1,500,000 $15.520.000 $17,020,000 $21,780,000 $ 5 1,500 0005 1.500,000 $ 1.500.000 15.200 0005 14,400,000 $34.400.000 15.700.000 $1, 000 $ 15.900.000 19.400.000 $1,100,000 13,300000 1.500,000 14.200,000 15,700,000 10,025.000 $1,500,000 $14.000.000 $15.500.000 16.000,000 $ 1.500,000 $ 1,500,000 $13,000.000 S 13,600.000 5 15,300,000 $ 15,100,000 $15.750,000 $ 15 500,000 +1 120 000 $ 120.0005 120.000 $ 120,000 5 120.000 € 120.000 $ 120,000 5 120 000 $ 129,00 5 120.000 20.000.000 € 20.000.0005 20,000,000 $20,000,000 300000S 0000S Depreciation rate 17 year MACSI Depreciable basis Depreciation Total operating expenses Operating profit (BIT) EBIT1-) at OC T 1-T)-Depreciation $ 20,000,000 $ 2,800,000 $ 2,920,000 13,580,000 1.000 10,948,000 $20,000,000 $ 5,000,000 $ 5,120.000 5 13,700.000 2.368.000 11.263.000 $20.000.000 6000005 .720.000 $ 1.050,000 10,836,000 14,436,000 20.000,000 2.490.000 2,520,000 15,000,000 10,120,000 12,520,000 $20.000000 20.000.000 300.000 $ 1,800 000 $ $ 1,320.0005 1.920,000 $ 16.350.000 16,380,000 9.828.000 9.828.000 11625.000 15,000,000 16.105.000 9.663,000 Depreciable bass Net woring capital AC cevable A payable Change in NWC Salvage value Tove sale Relevant projects 106,000 12.00 12.0 SL R100

Answer 1

Given the above results, the firm should invest in this product line because of following reasons:

1. The baseline NPV is positive, so the project will add to the firm's value if baseline results occur.
2. Sensitivity & Scenario analysis are showing that both the worst case scenario & the expected scenario NPVs are also positive. Thus even if the worst expected pessimistic conditions prevail w.r.t. price, variable costs & sales, the project will still have a positive NPV (as per summary table) & thus add to the firm's value.
3. Break Even analysis is showing that all 3 types of break even i.e. accounting break even, cash break even & financial break even quantities are well below the expected sales quantities. So even if the sales estimates go drastically wrong & actual sales turn out to be as low as the quantities indicated in break even analysis, the project will still not cause any loss ( accounting loss, cash loss & financial loss respectively) to the firm by at least being able to recover the invested capital & costs in respective terms.