19. Sensitivity Analysis For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project's profitability. How could you address this concern for Automatic Transmissions? Describe how you would calculate your answer. What values performs its LO 3 would you use for the other forecast variables? 20. Sensitivity Analysis We are evaluating a project that costs $1.68 million has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. LO 3 а. b. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. 21. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. 22. Calculating Project Cash Flows and NPV Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $835,000 per year. The fixed costs associated with this will be $204,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $865,000 and will be depreciated in a straight- line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 23 percent and a required return of 13 percent. Calculate the payback period, NPV, and IRR. LO 3 LO 2 ERMEDIATE (Questions 23-28) 2 23. Cost-Cutting Proposals CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $144,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage