Case - Further analysis of capital budgeting proposal

Using your analysis of the project in case 1, calculate:

Break even values

1. The operating break-even point for the first year of operations (i.e., the number of units that must be sold in the first year of operations for operating profit in that year to equal zero).

2. The "initial price" that will make the payback period for the project equal to 6 quarters.

3. Explain how knowing these break-even values together with the IRR (another break even value) can be helpful to the company evaluating this project.

Sensitivity analysis

1. Calculate the sensitivity of the project to changes in equipment cost, units sold in the first quarter, initial price, cost of labor per hour, and beta.

2. Explain how the information generated from this sensitivity analysis can be useful to the company evaluating this project.

Scenario analysis

1. Determine the NPV of the project for a "faster growth/quicker competitor response" scenario by changing the following assumptions as indicated:

i. the quarterly growth rates are: 45%, 35%, and 0%, instead of 40%, 30% and 5%;

ii. initial per test cost for raw materials and supplies is 162.50, instead of 155 but do not increase during the term of the project;

iii. hours per quarter for hourly employees are 4800 in years 2 and 3, instead of 4250 and 5325 respectively;

iv. hourly employment cost is $0.25 greater than in the expected scenario; and

v. the expected market return is 13.5% instead of 12.5%.

2. Explain how this scenario analysis can be of value to the company evaluating this project.

Simulation - In order to conduct a Monte Carlo simulation for the project, you need to make changes in the spreadsheet to introduce randomness. Explain how you would do so for the variables described below. (Explain or specify the equation(s) you would use to generate the indicated random number, and where in the spreadsheet the equation(s) would be entered.):

1. Tests performed in the first quarter vary with a uniform distribution between 6000 and 9000 units. (The number of tests must be an integer.)

2. The initial test price varies with a uniform distribution between 150 and 200, and need not be an integer.

3. Hours per quarter for hourly employees varies in each quarter with a mean equal to the number indicated in the assumption and a standard deviation of 0.10.

4. Explain how the information generated from a Monte Carlo simulation can be useful to the company in evaluating this project.

Attachment:- Assignemnt Files.rar