Reference no: EM132000470

Brutech Corporation is considering whether or not to launch its new product, a kiosk for checking in medical patients at doctor’s offices. Marketing research is confident the kioskwill sell 1,300 units per year, but the finance department is also evaluating the risks that unit sales and other key forecast variables might pose if the initial data differs from reality.

In the Base Case, the selling price on the 1,300 units will be $2,100 per kiosk. Variable costsper unitwill be $1,300, and fixed costs will be $200,000 per year. The company pays a tax rate of 34%. The total investment needed to undertake the projectis $2,500,000. This amount (I) will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Brutechhas a 25percent required return on new projects.

The project has a zero NPV when the present value of the operating cash flows equals the $2,500,000 investment. Because the cash flow is the same each year, we can solve for the unknown amount by viewing it as an ordinary annuity. Since the formula for calculating PVIFAr, Nis [1-(1+r)-N]/r, the PVIFA 25%,5= [1-(1.25)-5]/0.25= (1-.326780) / 0.25 = .672320 / 0.25 = 2.6893 The OCF* can /be determined as follows:OCF*= $2,500,000/2.6893

                            Lower Bound                     Upper Bound

Unit Sales                  1,200                                 1,400

Sales price per unit       $1,800                          $2,400

Variable cost per unit     $1,100                        $1,500

Fixed Costs                 $150,000                      $250,000

1-Assuming the Base Case, what effect would a decrease of $50 in the variable cost per unit have on the operating cash flow?

2-Assuming the Base Case, what effect would an increaseof $100 in the sales price per unit have on the operating cash flow?