Himalaya Products Inc. (Himalaya) is considering the introduction of a new product, Gamma. The firm has gathered the following information relevant to the project:
* Initial fixed capital outlay: $100,000
* Initial working capital outlay: $10,000
* Life of the project: 5 years
* Capital recovery at project end: fixed $18,000; working $7,000
* Sales units forecast: 50,000 units in year 1, growing at 6% per annum thereafter
* Unit selling price: $2.75
* Unit production cost: $1.28
* Annual fixed overhead cost: $35,000
* Annual tax rate of depreciation claimable: 20% per annum
* Annual income tax rate: 35%
* Required rate of return: 9% per annum
Due to the launching of the new product, the net income after tax of Beta (i.e. Himalaya’s old product) is expected to reduced by $200 per annum starting at the end of year 1 of the project, and up to the end of year 5. Product Gamma was initiated following a research conducted 2 (two) years ago by an external market research consultant, where the company paid $50,000 for the research.
For these data:
(a) Prepare a schedule showing the relevant cash flows for the project and calculate an NPV for the project under the given base-case scenario.
(b) Perform sensitivity analyses on the following variables: initial fixed capital outlay, unit selling price, annual sales growth rate, unit production cost.
(c) Which variables are sensitive variables? Why?
(d) Advise management of the analyses regarding the new product Gamma, and make appropriate investment recommendations.