You are the financial analyst for a tennis racket manufacturer. You are given th
ID: 2798308 • Letter: Y
Question
You are the financial analyst for a tennis racket manufacturer. You are given the following information on launching a new project:
Pessimistic
Expected
Optimistic
Market Size
20000
25000
30000
Market Share
75%
35%
50%
Price
90
100
115
Variable Costs
60
55
50
Fixed Costs
250000
200000
175000
Initial investment
300000
275000
250000
(((((((((((((((Hi, I'm not too sure about the probabilities it does not give them to me on my homework assignment))))))))))))
The tax rate is 40%. Depreciation is $50,000 per year, and the life of the project is 3 years. Do a sensitivity analysis by building a model in Excel. Should you do the project? Why?
Suppose your competitor also introduces a new racket. As a result, the market size increases to the optimistic level, but your market share decreases to the pessimistic level. Does this change your answer? Why?
Pessimistic
Expected
Optimistic
Market Size
20000
25000
30000
Market Share
75%
35%
50%
Price
90
100
115
Variable Costs
60
55
50
Fixed Costs
250000
200000
175000
Initial investment
300000
275000
250000
Explanation / Answer
A / 1 B C D E 2 Particulars Pessimistic Expected Optimistic 3 Market Size 20000 25000 30000 4 Market Share 75% 35% 50% 5 Price 90 100 115 6 Variable Costs 60 55 50 7 Fixed Costs 250000 200000 175000 8 Initial investment (A) 300000 275000 250000 9 Production Units 15000 8750 15000 10 Sales Revenue 1350000 875000 1725000 11 formula =C9*C5 =D9*D5 =E9*E5 12 Less: Variable Cost 900000 481250 750000 13 Contribution Margin 450000 393750 975000 14 Less: Fixed Cost 250000 200000 175000 15 EBITDA 200000 193750 800000 16 Less: Depreciation 50000 50000 50000 17 EBIT 150000 143750 750000 18 Less: Tax @40% 60000 57500 300000 19 Net Profit 90000 86250 450000 20 Net Cashflow 140000 136250 500000 21 No of years 3 3 3 22 Total Net Cashflow for 3 years(B) 420000 408750 1500000 23 Net Value(B-A) 120000 133750 1250000 24 The project can be viable and be taken up. 25 26 If competitor introduces racket business: 27 Particulars Expected 28 Market Size increased to optimistic 30000 29 Market Share decreases to pessimistic 75% 30 Price 100 31 Variable Costs 55 32 Fixed Costs 200000 33 Initial investment (A) 275000 34 Production Units 22500 35 Sales Revenue 2250000 36 formula =D33*D29 37 Less: Variable Cost 1237500 38 Contribution Margin 1012500 39 Less: Fixed Cost 200000 40 EBITDA 812500 41 Less: Depreciation 50000 42 EBIT 762500 43 Less: Tax @40% 305000 44 Net Profit 457500 45 Net Cashflow 507500 46 No of years 3 47 Total Net Profit for 3 years(B) 1522500 48 Net Value(B-A) 1247500 49 The project can be taken up as net value is very high
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