Manor Holding please large company with business is currently concert no Project

Question

Manor Holding please large company with business is currently concert no Project Attica and has gathered the following data The most likely sales income the project is expected to generate is: Research suggest these values may be 5% higher in the best case scenario and 5% lower in the worst case scenario. These costs, net of depreciation, may vary by + or - 10% in the worst and best case scenarios respectively Estimates of the cost of capital range from 8% (best case) to 12% (worst case) with the most likely being 10%. The company assesses investments such as Project Attica by calculating the best case NPV and the worst case NPV as well as the most likely NPV. Ignore taxation and inflation. Calculate the best case, most likely case and worse case net present values (NPV) for Project Attica. A new member of the finance team at Manor Holdings has experience of using sensitivity analysis for evaluating investments The method suggested, starting with the most likely scenario, is to calculate the percentage change in the present value of each variable that would reduce the project NPV to zero. Using the most likely cost of capital of 10%. calculate the sensitivity of Project Attica to changes In: the strengths and weaknesses of the two risk analysis techniques used above ways in which Manor Holdings could take account of risk in investment appraisal.

Explanation / Answer

(1)

Annual depreciation = 600,000 / 3 = 200,000

Since annual incremental costs include depreciation, each value will be lower by 200,000 when we compute Annual Cash Outflow, since depreciation being a non-cash expense cannot be considered within a cash flow analysis, and so is deducted the depreciation-inclusive incremental cost.

(a) Best Case

(b) Most Likely

(c) Worst Case

NOTE: First question is answered in full.

**If entire table is not visible in your screen, use this Dropbox link for the working file:

https://www.dropbox.com/s/yv2iz1kr46txtkx/A%2016%20-%20NPV%20Scenario.xlsx?dl=0

BEST CASE Year First Cost Cost-Depreciation Sales Net cash flow (NCF) Discount factor @8% Discounted NCF (A) (B) (C) (D)=(C)-(A)-(B) (E) (D) x (E) 0 6,00,000 -6,00,000 1.0000 -6,00,000 1 2,70,000 8,40,000 5,70,000 0.9259 5,27,778 2 3,60,000 9,45,000 5,85,000 0.8573 5,01,543 3 4,50,000 10,50,000 6,00,000 0.7938 4,76,299 NPV ($) = 9,05,620

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