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(solution) 1. SCENARIO ANALYSIS: We are evaluating a project that costs


Can you help with this assignment? Please answer in Excel so that equations are visible. 


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? (Round answer to 2 decimal places, round intermediate calculations to 5 decimal places)

 

What is the Worst Case NPV? (Round answer to 2 decimal places, round intermediate calculations to 5 decimal places) 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? (Round answer to 2 decimal places, round intermediate

 

calculations to 5 decimal places)

 

What is the NPV if the company decides to wait 1 year to purchases the machine? (Round answer to 2 decimal places,

 

round intermediate calculations to 5 decimal places)

 

What is the NPV if the company decides to wait 2 years to purchases the machine? (Round answer to 2 decimal places,

 

round intermediate calculations to 5 decimal places)

 

What is the NPV if the company decides to wait 3 years to purchases the machine? (Round answer to 2 decimal places, round intermediate calculations to 5 decimal places)

 

What is the NPV if the company decides to wait 4 years to purchases the machine? (Round answer to 2 decimal places,

 

round intermediate calculations to 5 decimal places)

 

What is the NPV if the company decides to wait 5 years to purchases the machine? (Round answer to 2 decimal places,

 

round intermediate calculations to 5 decimal places) 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? (Round answer to 2 decimal places, round intermediate calculations to

 

5 decimal places)

 

What is the NPV of test-marketing before going to market? (Round answer to 2 decimal places, round intermediate

 

calculations to 5 decimal places) 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? (Round answers to 2 decimal places, round intermediate calculations to 5 decimal places)

 

Calculate the Accounting Break-Even Point. (Round answers to 0 decimal places, round intermediate calculations to 5 decimal

 

places)

 

Calculate the Financial Break-Even Point. (Round answers to 0 decimal places, round intermediate calculations to 5 decimal

 

places)

 

In dollar terms, what is the sensitivity of NPV to changes in the units sold projection? (Round answer to 2 decimal places,

 

round intermediate calculations to 5 decimal places)

 

In percentage terms, what is the sensitivity of NPV to changes in the units sold projection? (Round answer to 4 decimal

 

places, round intermediate calculations to 5 decimal places)

 

In dollar terms, what is the sensitivity of OCF to changes in the variable cost per unit projection? (Round answer to 2

 

decimal places, round intermediate calculations to 5 decimal places) In percentage terms, what is the sensitivity of OCF to changes in the variable cost per unit projection? (Round answer to 4 decim 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

 


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