Capital Budgeting Assignment: PIONG Corporation NPV, IRR & Sensitivity Analysis for Screen Protector Project

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 RM120,000. The company, however, estimated the machine could be sold as scrap for RM100,000. The corporate tax rate is 25%. The weighted average cost of capital is 15%.

Required

1. Develop a spreadsheet model and use it to find the project’s NPV, IRR, and payback.
2. 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.
3. Conduct a scenario analysis. Assume that the best scenario is with no increase in the sales price, an annual 10% increase in the number of units sold, and a 5% decrease in the variable cost per unit. All other variables remain the same. For the worst-case scenario, only the variable cost per unit will increase by 2%. All other variables will remain as in the base case. The best-case condition has a probability of 30% that it will happen, while the worst-case condition has a 30%, and the base case is assumed to have the remaining probability. Determine the expected NPV, the standard deviation of the NPV and the project’s coefficient of variation NPV.
4. Based on your analysis in part 1,2 and 3, would you recommend that the project be accepted? What added advise and special attention would you give to the company regarding the project?