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

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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 &amp; 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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