Reference no: EM131543321

1. BMT has developed a new product. It can go into production for an initial investment of $2,000,000. The equipment will be depreciated using straight-line depreciation over 4 years to a value of zero. The firm believes that net working capital at each date will equal 40 percent of next year’s forecast sales. The firm estimates that variable costs are equal to 45% of sales and fixed costs are $500,000 per year. Sales forecasts in dollars are below. The project will come to an end after 4 years, when the product becomes obsolete. The firm’s tax rate is 35 percent, and the discount rate is 8 percent. (Note: if the taxable income is negative you can assume a tax shield by including a negative tax amount) Calculate the NPV. Year 0 1 2 3 4 Sales forecast (in $): 0 1,000,000 2,800,000 3,200,000 4,000,000

2. Perform sensitivity analysis on the following assumptions and find the revised NPV (a) sales are 10% lower each year than predicted above (b) the discount rate is 10 percent