Part 1.

Key Input Data

Equipment cost plus installation $175,000 Salvage Value after 3 year $0

Increase in current assets $35,000 Tax rate 27%
Increase in current liabilities $15,000 WACC 10%
Unit sales 115,000
Sales price per unit $3.25
Variable cost per unit 60%
Variable cost per unit (in dollars) $1.95
Fixed costs $70,000

Part 2. Depreciation and Amortization Schedule Years Accum'd

Year Initial Cost 1 2 3 Deprn
175,000
Equipment Deprn Rate 33.3% 33.3% 33.3%
Equipment Deprn, Dollars $58,333 $58,333 $58,333
Ending Bk Val: Cost - Accum'd Deprn $0

Part 3. After-Tax Salvage Value at end of Year 3 Equipment

Estimated Market Value $0
Book Value 0
Expected Gain or Loss 0
Taxes paid or tax credit 0
After-tax salvage value $0

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Part 4. Project Cash Flow Analysis
0 1 2 3
Investment Outlays at Time = 0
Equipment (175,000)
Increase in NWC (20,000)

Operating Cash Flows over the Project's Life

Units sold 115,000 115,000 115,000
Sales price $3.25 $3.25 $3.25

Sales revenues $373,750 $373,750 $373,750

Variable costs 224,250 224,250 224,250
Fixed operating costs 70,000 70,000 70,000
Depreciation (equipment) 58,333 58,333 58,333
EBIT (Operating income) $21,167 $21,167 $21,167
Taxes on operating income 5,715 5,715 5,715
EBIT (1 ‒ T) = After-tax operating income $15,452 $15,452 $15,452
Add back depreciation 58,333 58,333 58,333
EBIT (1 ‒ T) + Depreciation $73,785 $73,785 $73,785
Terminal Cash Flows at Time = 3
Salvage value $0
Tax on salvage value 0
After-tax salvage value $0
Recovery of net operating working capital 20,000

Project FCFs = EBIT (1 ‒ T) + DEP ‒ CAPEX ‒ ΔNOWC ($195,000) $73,785 $73,785 $93,785

Net Present Value (at 10%) $3,519

Sensitivity Analysis
Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV
if each variable were better or worse than the base-case level, holding other things constant.

% Deviation UNIT SALES % Deviation WACC

from Units NPV from NPV
Base Case Sales $3,519 Base Case WACC $3,519
-20% 92,000 -20% 8.0%
-10% 103,500 -10% 9.0%
0% 115,000 Base Case 0% 10.0%
10% 126,500 10% 11.0%
20% 138,000 20% 12.0%

% Deviation VARIABLE COSTS % Deviation SALES PRICE *Note: For variable costs, the chang
from Variable NPV from Sales NPV
Base Case Costs $3,519 Base Case Price $3,519
-20% $1.56 -20% $2.60
-10% $1.76 -10% $2.93
0% $1.95 Base Case 0% $3.25
10% $2.15 10% $3.58
20% $2.34 20% $3.90

% Deviation FIXED COSTS % Deviation EQUIPMENT COST

from Fixed NPV from Equipment NPV

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Base Case Costs $3,519 Base Case Cost $3,519
-20% $56,000 -20% $140,000
-10% $63,000 -10% $157,500
0% $70,000 Base Case 0% $175,000
10% $77,000 10% $192,500
20% $84,000 20% $210,000

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 Sensitivity Analysis
NPV

$70,000

$50,000
Sales Price/
Unit Sales
$30,000

$10,000 WACC

($10,000) FC
Equipment Cost

($30,000) VC

($50,000)
-20% -10% 0% 10% 20%

Deviation NPV at Different Deviations from Base

from Sales Variable Unit Fixed Equipment
Base Case Price Costs Sales Costs WACC Cost
-20% ($50,762) $84,939 ($50,762) $28,934 $11,028 $30,685
-10%
0%
10%
20%

Range 108,561 162,842 108,561 50,831 14,573 54,333

Scenario Analysis
Note that "best-case" values for variable costs, fixed costs, WACC, and equipment cost are 20% less than base-case values,
while the "worst-case" values for variable costs, fixed costs, WACC, and equipment cost are 20% higher than base-case
values. Howver, the reverse is true for sales price and unit sales

Sales Variable Unit Fixed Equipment

Scenario Probability Price Costs Sales Costs WACC Cost NPV

Best Case 25% $3.90 $1.56 138,000 $56,000 8% $140,000 $390,500

Base Case 50% $3.25 $1.95 115,000 $70,000 10% $175,000 $3,519
Worst Case 25% $2.60 $2.34 92,000 $84,000 12% $210,000 ($275,710)

Expected NPV = sum, prob times NPV $30,457

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For variable costs, the changes will be based on $1.95 as the base case. You can also change the percentage, i.e., from 60% of sales price to 50% of sales price, e

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The analysis is most sensitive to the variable costs per unit and also sales price per unit/unit sales.
Cory should pay close attention to the estimation of these three variables and find ways to ensure that the sales price/unit sales do not decrease too much f
Cory should also estimate how likely it is that the variable costs may increase or sales price/unit sales may drop (example, does the product have a close co

The analysis is least sensitive to WACC as the NPV is still positive even if WACC increases by 20%

*To find NPV, you would need to key in the inputs manually in the above spreadsheet and re-do each calculation.

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Machine Cost 95000.00
Number of years 5
Fixed cost 1800
Variable cost per serving 0.5
Number of servings per day 100
Price per serving 1.25
Tax rate 27%
WACC 10%

Annual depreciation 19,000.0

Number of serving per year 36,500.0
Year 0 FCFF (95,000.0)
Annual FCFF (Yr 1 to Yr 5) 23,799.8

NPV (4,780.22)

To find breakeven machine cost, set NPV = 0 by changing machine cost