The new product line would generate incremental sales of 1,350 units per year for 4 years
The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 15% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 12%. 7.Explain scenario analysis and any problems, issues, or concerns that surround this type of projection. 8.Define simulation analysis, and discuss its principal advantages and disadvantages. 9.Assume that IOW’s average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? 10.IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. 11.Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.