PART 2. RISK ANALYSIS AND PROJECT EVALUATION

Case Study 2:

Your company has another project to launch a new toy product that is expected to sell for an average price of $50 per item. Launching this project will require the company to buy an equipment with the cost of $450,000 and residual value of $50,000 after five year. The company expects it can sell 200,000 unit per year at this price for a period of 5 years with this equipment. An additional working capital requirement for producing this product is $50,000, which is expected to be retrieved at the end of the project.  Other information is available below: 

Variable cost per unit of $20

Cash fixed costs per year is $30,000

Depreciation method: straight line

Discount rate: xxx% Tax Rate: 30% 

Your financial department conducted some economics forecast and estimated that in the coming time, there may not be any significant changes in variable cost per unit and total fixed costs per year in production. However, sales may be subject to an unexpected outcome due to the rivalry of your company’s competitor. This competitor is also developing their new toy with similar features.   If the competitor successfully launches their new toy and occupies the best potential market before you, the worst-case scenario will occur to your company product, where both unit sales and price per unit decrease by 15%. If your company successfully launches your new product and occupy the best potential market before your competitor, then your company can enjoy a 15% increase in both unit sales and price per unit.

Perform a scenario analysis with cash flows of the project to determine the sensitivity of the project NPV with the following changes in the value drivers in the worst-case scenario and best- case scenario.

Worst case scenario:

Unit sales decrease by 15%

Price per unit decreases by 15%

Best case scenario:

Unit sales increase by 15%

Price per unit increases by 15%

Provide your results in (a) relevant tables. A conclusion on the risks of the project cash flows need to be drawn out.

CONCLUSION

Based on the outcome of two parts, provide brief conclusion, summarizing what you have done in the assignment.