Whimsical Corporation is an international manufacturer for
women. Management at Whimsical 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 2,000,000 units at
$60 per unit; cash variable cost is @20 per unit; and cash fixed cost is
$7,000,000 per year. The investment project requires $75,000,000 of cash
outflow and has a project life of 5 years. At the end of the 5 year useful life
there will be no terminal disposal value. Assume all cash flows occur at year
end except for initial investment amounts Men’s fragrance is a new market for
whimsical 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. Whimsical required rate of return on
this project is 14%.
1. a. what is the formula for annual net cash inflow:
(? – ?) * ? – ? = Annual net cash inflow
b. Complete the table below to calculate the net present
value of this investment proposal
2. a. Calculate the effect on the net present value if the
selling price per unit is reduced by 15% (round selling price per unit to the
nearest cent)
b. Calculate the effect on the net present value from
question 1, b. if the VC per unit is increased by 15% (Round VC per unit to the
nearest cent)
