Assignment
1. SCENARIO ANALYSIS: We are evaluating a project that costs $688000, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 45000 units per year. Price per unit is $53, variable cost per unit is $25, and fixed costs are $520000 per year. The tax rate is 30%, and we require a return of 15% on this project. Suppose the projections given for price, quantity sold, variable costs, and fixed costs are all accurate to within ±10 percent.
What is the Best Case NPV?
What is the Worst Case NPV?
Best Case NPV
Worst Case NPV
2. REAL OPTION ANALYSIS: Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $330000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000.
The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 13 %.
What is the NPV if the company purchases the machine today?
What is the NPV if the company decides to wait 1 year to purchases the machine?
What is the NPV if the company decides to wait 2 years to purchases the machine?
What is the NPV if the company decides to wait 3 years to purchases the machine?
What is the NPV if the company decides to wait 4 years to purchases the machine?
What is the NPV if the company decides to wait 5 years to purchases the machine?
NPV if Purchased Today
NPV if Purchased in 1 Year
NPV if Purchased in 2 Years
NPV if Purchased in 3 Years
NPV if Purchased in 4 Years
NPV if Purchased in 5 Years
3. REAL OPTION ANALYSIS: Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $30.6 million. If the HD DVD fails, the present value of the payoff is $8.6 million. If the product goes directly to market, there is a 60 percent chance of success.
Alternatively, Osceola can delay the launch by one year and spend $1.32 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%.
What is the NPV of going directly to market?
What is the NPV of test-marketing before going to market?
NPV of Going to Market
NPV of Test-Marketing
4. BREAK-EVEN & SENSITIVITY ANALYSIS: We are evaluating a project that costs $844000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 68000 units per year. Price per unit is $37, variable cost per unit is $17, and fixed costs are $422000 per year.
The tax rate is 35%, and we require a return of 20% on this project.
What is the NPV of this base-case?
Calculate the Accounting Break-Even Point.
Calculate the Financial Break-Even Point.
In dollar terms, what is the sensitivity of NPV to changes in the units sold projection?
In percentage terms, what is the sensitivity of NPV to changes in the units sold projection?
In dollar terms, what is the sensitivity of OCF to changes in the variable cost per unit projection?
In percentage terms, what is the sensitivity of OCF to changes in the variable cost per unit projection?
Base Case NPV
Accounting Break-Even
Financial Break-Even
Dollar Sensitivity of NPV
Percent Sensitivity of NPV
Dollar Sensitivity of OCF
Percent Sensitivity of OCF