Evaluate the Pear Computer Company proposal. 2) Conduct a sensitivity analysis that focuses on the cost...

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Finance

Evaluate the Pear Computer Company proposal.
2) Conduct a sensitivity analysis that focuses on the cost ofcapital. For a best case scenario, decrease the cost of capital bythree percentage points. For a worst case scenario, increase thecost of capital by three percentage points.
3) You must provide one spreadsheet for each of the threesituations—the base case estimate, the best case, and the worstcase.
4) What do you recommend? Explain. You may type yourrecommendation and explanation on the Excel sheet. Pear Computer’sresearch and development (R&D) department has developed aproposal for a new generation of tablet-sized computers.
1. Project’s useful life: 4 years.
2. Capital expenditures: $25,000,000.
3. Depreciation: straight-line over 4 years.
4. Sales: 25000 units in year 1, 95,000 in year 2, 70,000 inyear 3, 25,000 in year 4. The sales price is expected to remainconstant at $580.
5. Cost of goods sold (not counting depreciation): 60% ofsales.
6. Selling, general and administrative expenses: $1,500,000 thefirst year, $1,750,000 the second year, $1,000,000 the third, and$500,000 the 4th .
7. R&D: $1,500,000 spent one year ago.
8. Initial investment in net working capital: $1,250,000. Thenit increases by $10,000 for each of three years and finally isfully recovered in the final year.
9. Tax rate: 38%.
10. Cost of Capital: 14%.

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3.6 Ratings (524 Votes)

BASE CASE 0 1 2 3 4 Sales in units 25000 95000 70000 25000 Sales revenue at 580unit 14500000 55100000 40600000 14500000 Cost of goods sold at 60 of sales 8700000 33060000 24360000 8700000 Depreciation 250000004 6250000 6250000 6250000 6250000 Selling and administrative expenses 1500000 1750000 1000000 500000 NOI 1950000 14040000 8990000 950000 Tax at 38 741000 5335200 3416200 361000 NOPAT 1209000 8704800 5573800 589000 Less Depreciation 6250000 6250000 6250000 See Answer

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Transcribed Image Text

Evaluate the Pear Computer Company proposal.2) Conduct a sensitivity analysis that focuses on the cost ofcapital. For a best case scenario, decrease the cost of capital bythree percentage points. For a worst case scenario, increase thecost of capital by three percentage points.3) You must provide one spreadsheet for each of the threesituations—the base case estimate, the best case, and the worstcase.4) What do you recommend? Explain. You may type yourrecommendation and explanation on the Excel sheet. Pear Computer’sresearch and development (R&D) department has developed aproposal for a new generation of tablet-sized computers.1. Project’s useful life: 4 years.2. Capital expenditures: $25,000,000.3. Depreciation: straight-line over 4 years.4. Sales: 25000 units in year 1, 95,000 in year 2, 70,000 inyear 3, 25,000 in year 4. The sales price is expected to remainconstant at $580.5. Cost of goods sold (not counting depreciation): 60% ofsales.6. Selling, general and administrative expenses: $1,500,000 thefirst year, $1,750,000 the second year, $1,000,000 the third, and$500,000 the 4th .7. R&D: $1,500,000 spent one year ago.8. Initial investment in net working capital: $1,250,000. Thenit increases by $10,000 for each of three years and finally isfully recovered in the final year.9. Tax rate: 38%.10. Cost of Capital: 14%.