Capital Budgeting Assignment Report: NPV, IRR, Sensitivity & Scenario Analysis for PIONG Corporation

Assignment Requirements

1. Prepare a 3 to 5-page of written analysis. of the case. The complete report should also include as appendixes, all tables, graphs and calculations of your analysis. Type your response/findings/ answers using Microsoft Word. You can use Excel for your workings (calculation parts), but you need to copy and paste as image in Microsoft Word. Answers with verbatim quotations from references will not be accepted.
2. To submit please convert the completed Word document to PDF.
3. Any font type will do but make sure that the font size is 12 with 1.5 spacing.
4. The cover page should include the assignment title, course code, course name, your name, and matric number.
5. Reference/s should be clearly spelt out (on ONE separate page at the end of your answer).

Assignment Question

PIONG Corporation has developed a new screen protector that can be used on handphones. It would cost RM800,000 to buy the equipment necessary to manufacture the protectors, and initially at year 0, it would require net operating working capital equal to 10% of the 1st year sales amount. Thereafter, the annual net operating working capital will be 12% of next year’s sales. The project would have a life of 5 years. If the project is undertaken, it will be operated for the entire 5 years.

The projection for the number of units that can be sold is as follows:

• Year Units Sold
• 1 36,000
• 2 44,000
• 3 44,000
• 4 41,000
• 5 25,000

The new screen protector would sell for RM17.00 per unit. After the first year, PIONG intends to increase the sales price by 2% annually. The variable cost is RM1.20 per unit and will increase at a rate of 5% annually. The company’s fixed costs would be RM320,000 in Year 1 and would increase at a rate of 3% annually.

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?