Question

$ Equipment Pretax salvage value $ R&D 32,500,000 3,500,000 750,000 200,000 Marketing study $ Year 3 108,000 Year 4 94,000 Year 5 57,000 Sales (units) Sales of old PDA Lost sales Depreciation rate Year 1 65,000 80,000 15,000 14.29% Year 2 82,000 60,000 15,000 24.49% 17.45% 329% 17.49% 2954 12.49% 8.93% Price 500 215 4,300,000 35% 20% 12% Tax rate NWC percentage Required return Sales VC Fixed costs Dep EBT Tax Year 1 $32,500,000 13,975,000 4,300,000 4,644,250 $9,580,750 3,353,263 $6,227,488 4,644,250 $10,871,738 Year 2 $41,000,000 17,630,000 4,300,000 7,959,250 $11,110,750 3,888,763 $7,221,988 7,959,250 $15,181,238 Year 3 $54,000,000 23,220,000 4,300,000 5,684,250 $20,795,750 7,278,513 $13,517,238 5,684,250 $19,201,488 Year 4 $47,000,000 20,210,000 4,300,000 4,059,250 $18,430,750 6,450,763 $11,979,988 4,059,250 $16,039,238 Year 5 $28,500,000 12,255,000 4,300,000 2,902,250 $9,042,750 3,164,963 $5,877,788 2,902,250 $8,780,038 NI Dep OCF $0 $9,400,000 NWC Beg End NWC CF 6,500,000 ($6,500,000) $6,500,000 8,200,000 ($1,700,000) $8,200,000 10,800,000 ($2,600,000) $10,800,000 9,400,000 $1,400,000 $9,400,000 Net CF $4,371,738 $13,481,238 $16,601,488 $17,439,238 $18,180,038 Salvage BV of equipment Taxes $ $ 7,250,750 1,312,763 Salvage CF $ 4,812,763 Time $ Cash flow (32,500,000) 4,371,738 13,481,238 16,601,488 17,439,238 22,992,800

a.	What is the profitability index of the project?
	1.30
b.	What is the IRR of the project?
	28.31%
c.	What is the NPV of the project?
	$       18,096,790.85
d.	How sensitive is the NPV to changes in the price of the new PDA?
e.	How sensitive is the NPV to changes in the quantity sold?

I want to make sure a b and c are correct and need d and e

Answer 1

Equipment	32500000
Pretax salvage value	3500000
R&D	750000
Marketing study	200000
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales (units)	65000	82000	108000	94000	57000
Depreciation rate	14.29%	24.49%	17.49%	12.49%	8.93%
Price	500
VC	215
FC	4300000
Tax rate	35.00%
NWC percentage	20.00%
Required return	12.00%
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	32500000	41000000	54000000	47000000	28500000
Less: VC	13975000	17630000	23220000	20210000	12255000
Less: Fixed costs	4300000	4300000	4300000	4300000	4300000
Less: Dep	4644250	7959250	5684250	4059250	2902250
EBT	9580750	11110750	20795750	18430750	9042750
Less: Tax	3353262.5	3888762.5	7278512.5	6450762.5	3164962.5
NI	6227487.5	7221987.5	13517237.5	11979987.5	5877787.5
+Dep	4644250	7959250	5684250	4059250	2902250
OCF	10871737.5	15181237.5	19201487.5	16039237.5	8780037.5
NWC
Beg	0	6500000	8200000	10800000	9400000
End	6500000	8200000	10800000	9400000	0
NWC CF	-6500000	-1700000	-2600000	1400000	9400000
Net CF	4371737.5	13481237.5	16601487.5	17439237.5	18180037.5
Salvage	3500000
BV of equipment = Cost of Equipment - Depreciation)	7250750
Taxes (BV - MV) x Tax Rate	1312762.5
Salvage CF = $4,100,000 + 243,827.50)	4812762.5
a)
Time	Cash flow	Cumulative Cash Flow
0	-32500000	-28128263
1	4371737.5	-23756525
2	13481237.5	-10275288
3	16601487.5	6326200
4	17439237.5	23765437.5
5	22992800
Payback period =	2.619	Years
b)
Time	Cash flow	PV @ 12%	Present Value
1	4371737.5	0.8929	3903337.05
2	13481237.5	0.7972	10747160
3	16601487.5	0.7118	11816610.9
4	17439237.5	0.6355	11082950.7
5	22992800	0.5674	13046732.2
		Total	50596790.9
Profitability Index = (PV of future cash flows) ÷ Initial investment
Profitability Index =	1.56
c) & d)	Time	Cash flow	PV @ 12%	Present Value
	0	-32500000	1.0000	-32500000
	1	4371737.5	0.8929	3903337.05
	2	13481237.5	0.7972	10747160
	3	16601487.5	0.7118	11816610.9
	4	17439237.5	0.6355	11082950.7
	5	22992800	0.5674	13046732.2
IRR	c)	28.31%	NPV	18096790.9	d)
e)
How sensitive is the NPV to changes in the price of the new PDA?
Price per unit	NPV	Sensitivity of NPV to price
Decrease $10	16252169.3	184462.157
Neutral	18096790.9	0
Increase $10	19941412.4	184462.157
For a $10  change in price of the new SMART PHONE, the NPV of the project changes $184462.157 in the same direction

f)
Units	NPV	Sensitivity of NPV to units sold
Decrease  100 units per year	$ 16,190,923.12	$  (19,058.68)
Neutral	$ 18,096,790.85	0
Increase 100 units per year	$ 20,002,658.58	$   19,058.68
For a one unit per year change in quantity sold of the new SMART PHONE, the NPV of the project changes $19058.68 in the same direction.