weled Outlook is analyzing a proposed project with expected sales of 9,200 units, ±4 percent. The expected variable cost per unit is $26 and the expected fixed costs are $49,000. Cost estimates are considered accurate within a range of ±5 percent. The depreciation expense is $18,300. The sale price is estimated at $52 a unit, ±3 percent. If the company conducts a sensitivity analysis using a variable cost of $27, what will be the total variable cost estimate

weled Outlook is analyzing a proposed project with expected sales of 9,200 units, ±4 percent. The expected variable cost per unit is $26 and the expected fixed costs are $49,000. Cost estimates are considered accurate within a range of ±5 percent. The depreciation expense is $18,300. The sale price is estimated at $52 a unit, ±3 percent. If the company conducts a sensitivity analysis using a variable cost of $27, what will be the total variable cost estimate

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 16P

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Huang Industries is considering a proposed project whose estimatedNPV is $12 million. This estimate assumes that economic conditions will be “average.”However, the CFO realizes that conditions could be better or worse, so she performed ascenario analysis and obtained these results: Calculate the project’s expected NPV, standard deviation, and coefficient of variation.
A company is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 15,000 units, \pm 5 percent. The expected variable cost per unit is $8 and the expected fixed costs are $ 40,000. The fixed and variable cost estimates are considered accurate within a \pm 7 percent range. The sales price is estimated at $15 a unit, \pm 6 percent. The project requires an initial investment of $120,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $30,000 at the end of the project. The project requires $12,000 in net working capital for the three years but will be fully recovered when the project closes. The discount rate is 12.8 percent and tax rate is 20 percent. What is the net present value for the optimistic scenario? $92,058.28 $94, 075.71 $ 96,093.14 $98,110.57 $100, 128.00
1. What is sensitivity analysis? 2. Perform a sensitvity analysis on the unit sales, salvage value, and WACC for a project. Assume that each of these variables deviates from its base-case, or expected value by plus or minus 10%, 20%, and 30%.The base case value for unit sales is 150,000. Calculate NPV for each case (18 NPV in total), then draw a graph with three lines (one for unit sales, one for salvage value, and one for WACC). At the end, perform a sensitivity analysis for the project (what you have seen, what conclusions you can make?). 3. What is the primary weakness of sensitvity analysis? What are its primary advantages?
Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome Recession ($40 million) (24 million) 12 million 18 million Boom 0.05 34 million Calculate the project's expected NPV, standard deviation, and coefficient of variation. Enter your answers for the project's expected NPV and standard deviation in millions. For example, an answer of $13,000,000 should be entered as 13. Do not round intermediate calculations. Round your answers to two decimal places. Below average Average Above average E(NPV): ONPV: CV: million million 0.05 0.20 0.50 NPV 0.20
Waste Management Inc. is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price will increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years, and there will be no salvage value. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? IRR? Would you accept this project? WACC 9.50% Net investment cost (depreciable basis) $100,000 Units sold 40,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. depr'n (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.33% Expected inflation 5.00% Tax rate 40.0% Please show work.
Your boss wants you to conduct a sensitivity and scenario analysis to determine whether the following project is a winner. You are entering an established market, and you know the market size will be 1,100,000 units. You are unsure of your exact market share, the price you will be able to charge, and your variable cost per unit, but have determined a range of possible values for each (in the table below). Your initial investment cost is $150 million, and that investment will depreciate in straight-line form over the 20-year life of the project. There are no new NWC requirements, and there will be no salvage value at the end of the 20 years. The tax rate is 35%. The discount rate is 18%. a) Use the following table to conduct a full sensitivity analysis for the project. Make sure to include the NPV for the expected outcome as part of the full sensitivity analysis. Also add the best- and worst-case scenarios to the full sensitivity analysis. Show all of your work (written out, not an…
Chadron Motors is reviewing a project with sales of 6,200 units, ±2 percent, at a sales price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the expected fixed costs are $85,578, ±1 percent. The depreciation expense is $68,000 and the tax rate is 21 percent. What is the net income under the worst-case scenario? A. $4,696 B. –$28,704 C. $15,846 D. −$39,713 E. −$38,578
Heckrwee Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year 2. The internal rate of return is a.between 18% and 20%. b.between 16% and 17%. c.under 15%. d.None of these choices are correct.
The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: 50 24 30 $370,000 36,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.4 million, which will be depreclated straight-line over the project life to a final value of zero. The firm's tax rate is 21% and the required rate of return is 14%. (For all the requirements, a negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project NPV in the worst-case scenario?
A firm made the following estimates for a project: price per unit = $18, variable cost per unit = $7, fixed cost = $60, and quantity = 25 units. The firm thinks that the actual value of each variable could be as much as 20% higher or lower. Find the operating cash flow in the best-case scenario if depreciation is $120 and the tax rate is 35%.
A plan sponsor is considering two U.K. investment managers, Birmingham Asset Management and Figleaf Equities, for the same mandate. Birmingham will produce on average an annual value-added return of 1.7 percent over the benchmark, with variability of the excess returns of 2.20 percent. Figleaf is expected to produce a higher annual value-added return of 4,1 percent, but with variability of excess returns around 11 percent.Calculate the information ratio for each and explain which manager offers the best record of performance.
Texas Instruments is concerned that the estimated future operating costs of its soon-to-be-purchased equipment may not be very accurate. Let's say, the fixed production costs end up being 15% higher than what the company's research team has estimated, and the variable production costs will on the other hand be 8% lower. Clearly, this will affect the valuation of the project. But to which extent?? To see the extent of the effect on the project's current value, one should perform calculations known as analysis. Multiple Choice break-even scenario O sensitivity O equivalent cost homemade