McGilla Sports Incorporation has decided to sell a new line of bicycles. The new bicycles will sell for $1050 per set and have a variable cost of $450 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-mark bicycles. The high-mark bicycles sell at $1,500 and have variable costs of $600. The company will also increase sales of its cheap bicycles by 15,000 sets. The cheap bicycles sell for $400 and have variable costs of $200 per set. The fixed costs each year will be $9,000,000. The company has also spent $1,000,000 on research and development for the new bicycles.

The plant and equipment required will cost $30,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,500,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.

Scenario Analysis: In this problem, you feel that the values are accurate to within only ±10%. What are the best-case and worst-case NPVs? ( Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.)

B. Sensitivity Analysis: McGilla Sports would like to know the sensitivity of NPV to changes in the price of the new bicycles and the quantity of new nicycles sold. What is the sensitivity of the NPV to each of these variables?