Reference no: EM132941499

Patterson Golf is considering manufacturing a new 'super-sized' golf club to compete with the highly successful debut of the Gargantuan Smasher, produced by KellerIndustries. The initial investment for this project would include $4,000,000 in new machinery and an additional $160,000 in setup costs (the amount to be depreciated is the sum of the machinery and setup costs). The project life would be 4 years, however, in accordance with the IRS, the depreciation method would be 5-yearMACRs. The relevant cost of capital has been estimated to be 12% and the applicable tax rate is 34%. For simplicity, assume that a $500,000 investment in NWC isrequired immediately (to be recovered at the project's end) and the assets involvedwould have a market value of $52,000 (before tax) at the end of 4 years.

Problem a) Conduct a scenario analysis for the 5 cases specified. What is the NPV in each scenario? What is the expected (i.e. probability-weighted) NPV?

Problem b) Conduct a sensitivity analysis on sales (# units), price per unit, variable costs, and fixed production costs. Specifically, calculate the dollar change in NPV, given a10% change in the input variable from its base-case (most-likely) value (e.g., specify that a 10% change in sales results in an $X change in NPV, etc..)