JD Sdn Bhd has developed a new industrial detergent that can be used in motor vehicle garages. It would cost RM1 million to buy the equipment necessary to manufacture the blenders, and initially, it would require net operating working capital equal to 15% of the 1st year sales amount. Net operating working capital will remain at the same rate. The project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years.

The firm believes it could sell 100,000 units per year. The detergents would sell for RM12 per unit. After the first year, JD intends to increase the sales price by 3% annually.

The variable cost is RM5 per unit and will increase at the inflation rate of 3%. The company’s fixed costs would be RM420,000 at Year 1 and would also increase at a rate of 3% annually.

The equipment would be depreciated over a 5-year period, using the straight-line method. The annual depreciation will be calculated based on a salvage value of the equipment at the end of the project’s 5-year life of RM200,000. The company however estimated the machine can be sold as scrap for RM250,000. The corporate tax rate is 25%.

The cost of capital is 12%.

Develop a spreadsheet model and use it to find the project’s NPV, IRR, and payback.

Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, number of units sold, the variable costs per unit, fixed costs, and the cost of capital. Set these variables’ values at 10% above and 10% below their base-case values. Include a graph in your analysis.

Conduct a scenario analysis. Assume that the best-case condition is no increase in the sales price, a 5% increase in the number of units sold, and a 3% decrease in the variable cost per unit. All other variables remain the same. For the worst-case condition, there will be a 5% decrease in units sold, a 2% decrease in unit price, and a 3% increase in the variable cost per unit. The best-case condition, worst-case condition, and the base case are assumed to have an equal probability. Determine the expected NPV, the standard deviation of the NPV, and the project’s coefficient of variation NPV.

On the basis of your analysis, would you recommend that the project be accepted? What added advice and special attention would you give to the company with regard to the project?

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