Reference no: EM133078403

Question - ABC Inc. is considering purchasing a new machine. The machine will cost $4,250,000. The machine will be used for a project that lasts 3 years. The expected salvage of the machine at the end of the project is $1,100,000. The machine will be used to produce widgets. The manufacturing department has forecasted that the company will be able to sell 380,000 widgets per year. The manufacturing department believes that the company will be able to charge $28 per widget. The production department, has indicated that the variable cost per widget will be $12. The company has forecasted that the incremental fixed costs associated with the project are $220,000 per year. The company believes that the project will require an initial investment in operating net working capital of $180,000. Thereafter, the investment in operating net working capital will be 12% of sales. Assume the asset class remains open.

The CCA rate is 30%, the tax rate is 34%, and the required rate of return is 8%.

Required - Your boss has also asked you to determine which input (units sold, price per unit, variable cost per unit, or fixed cost) has the greatest forecasting risk. Therefore, your boss has asked you to do a sensitivity analysis. Your boss wants you to vary the input forecast by 10% and determine the impact on the NPV of the project. Based on this analysis you are to determine which input has the greatest forecasting risk.