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    DCF, sensitivity analysis, no income taxes

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    Landom Corporation is an international manufacturer of fragrances for women. Management at Landom is considering expanding the product line to men's fragrances. From the best estimates of the marketing and production managers, annual sales (all for cash) for this new line is 1,000,000 units at $25 per unit; cash variable cost is $10 per unit; cash fixed costs is $5,000,000 per year. The investment project requires $30,000,000 of cash outflow and has a project life of 5 years.

    At the end of the five-year useful life, there will be no terminal disposal value. Asssume all cash flows occur at year-end expect for initial investment amounts. Men's fragrance is a new market for Landom, and management is concerned about the reliability of the estimates. The controller has proposed applying sensitivity analysis to selected factors. Ignore income taxes in your computations. Landom's required rate of return on this project is 14%.

    1. Calculate the net present value of this investment proposal.
    2. Calculate the effect on the net present value of the following two changes in assumptions. (Treat each item independently on the other)
    a. 5% reduction in the selling price
    b. 5% increase in the variable cost / unit
    3. Discuss how management would use the data developed in requirements 1 and 2 in its consideration of the proposed capital investment.

    * Complete in Excel

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    Solution Preview

    ** Please see the attached file for the complete solution response **

    Year 0 1 2 3 4 5
    Initial outlay -$30,000,000
    Selling price $25 $25 $25 $25 $25
    Selling units 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

    Sales revenue $25,000,000 $25,000,000 $25,000,000 $25,000,000 $25,000,000

    Fixed costs $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
    Variable costs $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000

    Net cash flow -$30,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000

    Year Cash flow Discount rate Discount factor Discounted cash ...

    Solution Summary

    This solution provides a complete computation of the given capital budgeting problem formatted in Excel.