Question 5

Angola Superheros, Inc. is considering launching a production of a new superhero toy. The production and sales are

expected to last 4 years. The project would require a new machine, with a cost of $1,000,000. The machine is

expected to be sold for $300,000 at the end of the project. The company estimates that 40,000 toys would be sold

annually, with a $15 contribution margin per unit (the difference between the selling price and the variable cost per

unit). In addition, the company will have to pay fixed costs equal to $35,000 each year. The minimum attractive rate

of return is 13%. (Note: You will need to provide a written answer for part a, and written comments discussing the

results of your analysis in part b.) (Note: Do not include the selling price or the variable cost per unit in your

analysis. Also, you will need to work with the total contribution to profits for all units, and fixed costs, instead of

Revenues and Costs.)

a) Compute the project's cash flows for years 0-4, calculate the present worth, annual worth, and the rate of

return of the project, and determine whether the project should be accepted, based on the information

given (disregarding any sensitivity analysis). Explain your answer.

b) Conduct the following sensitivity analysis, using the project's ANNUAL WORTH. Create a table where you

vary the following variables, one at a time: the contribution margin per unit, the annual number of units sold,

the annual fixed cost, and the machine's salvage value at the end of the project. Create a table, starting with

a Percent Change in its first column, with the following values: -50%, -40%, -30%, -20%, -10%, 0, 10%, 20%,

30%, 40%, and 50%. Follow with each variable and an Annual Worth column, corresponding to each of the

variables you vary. You can use the Excel example file posted under Week 7 as your guide (your tables and

set up will be slightly different, but similar). Vary each of the variables ranging from -50% to 50%, one at a

time, while keeping all of the other variables at their baseline values, recomputing the project's annual

worth each time. Insert a chart with the percent change on the horizontal axis, and the contribution margin,

number of units, fixed cost, and salvage value on the vertical axis. Comment on the sensitivity of the project's

annual worth to changes in each of the four variables, and the implications for accepting or rejecting the

project.