A. Inputs Initial investment ($ thousands) 10,000 Salvage value ($ thousands) 2,
ID: 2819542 • Letter: A
Question
A. Inputs Initial investment ($ thousands) 10,000 Salvage value ($ thousands) 2,000 Initial revenues ($ thousands) 15,000 Variable costs (% of revenues) 40.0% Initial fixed costs ($ thousands) 4,000 Initial total expenses ($ thousands) 10,000 Inflation rate (%) 5.0% Discount rate (%) 12.0% Receivables (% of sales) 16.7% Inventory (% of next year's costs) 15.0% Tax rate (%) 35.0% Year: 0 1 2 3 4 5 6 B. Fixed assets Investments in fixed assets 10,000 Sales of fixed assets 1,300 Cash flow from fixed assets -10,000 1,300 C. Operating cash flow Revenues 15,000 15,750 16,538 17,364 18,233 Variable expenses 6,000 6,300 6,615 6,946 7,293 Fixed expenses 4,000 4,200 4,410 4,631 4,862 Depreciation 2,000 2,000 2,000 2,000 2,000 Pretax profit 3,000 3,250 3,513 3,788 4,078 Tax 1,050 1,138 1,229 1,326 1,427 Profit after tax 1,950 2,113 2,283 2,462 2,650 Operating cash flow 3,950 4,113 4,283 4,462 4,650 D. Working capital Working capital 1,500 4,075 4,279 4,493 4,717 3,039 0 Change in working capital 1,500 2,575 204 214 225 -1,679 -3,039 Cash flow from investment in working capital -1,500 -2,575 -204 -214 -225 1,679 3,039 0.408 0.408 0.408 0.408 0.250 E. Project valuation Total project cash flow -11,500 1,375 3,909 4,069 4,238 6,329 4,339 Blooper's analysts have come up with the following revised estimates for its magnoosium mine Range Pessimistic Optimistic Initial investment Revenues Variable costs Fixed cost Working capital + 50% -15% + 15% +40% + 45% -25% + 15% -15% -50% -50 % Conduct a sensitivity analysis for each variable and range and compute the NPV for each. Use Spreadsheet 101 and accompanying data as a starting point for the analysis. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in thousands rounded to the nearest whole dollar.) Project NPV Expected Pessimistic Optimistic Initial investment Revenues Variable costs Fixed costs Working capitalExplanation / Answer
Working:
1. Note : While calculating discounted cash flow we does not take effect of inflation rate and discount it at Nominal discount rate given at 12%
2. Expeced NPV Working:
Year:
0
1
2
3
4
5
6
C. Operating cash flow
Revenues
15,000
15,750
16,538
17,364
18,233
Variable expenses
6,000
6,300
6,615
6,946
7,293
Fixed expenses
4,000
4,200
4,410
4,631
4,862
Depreciation
2,000
2,000
2,000
2,000
2,000
Pretax profit
3,000
3,250
3,513
3,788
4,078
Tax
1,050
1,138
1,229
1,326
1,427
Profit after tax
1,950
2,113
2,283
2,462
2,650
Operating cash flow
3,950
4,113
4,283
4,462
4,650
D. Working capital
Working capital
1,500
4,075
4,279
4,493
4,717
3,039
0
Change in working capital
1,500
2,575
204
214
225
-1,679
-3,039
Cash flow from investment in working capital
-1,500
-2,575
-204
-214
-225
1,679
3,039
0.408
0.408
0.408
0.408
0.25
E. Project valuation
Total project cash flow
-11,500
1,375
3,909
4,069
4,238
6,329
4,339
Add: Income from Sale of Fixed Asset
1300
Total Cash Flow
-11,500
1,375
3,909
4,069
4,238
6,329
5,639
Discount Factor
1
0.8929
0.7971
0.7116
0.6353
0.5672
0.5064
Dicounted Cash Flow
-11500
1228
3116
2896
2692
3590
2856
NPV
4877
3. Pesimistic NPV Working:
Pessimistic
Year:
0
1
2
3
4
5
6
Operating cash flow
Revenues
15,000
12,750
10,838
9,212
7,830
Variable expenses
6,000
6,900
7,935
9,125
10,494
Fixed expenses
4,000
5,600
7,840
10,976
15,366
Depreciation
2,000
2,000
2,000
2,000
2,000
Pretax profit
3,000
-1,750
-6,938
-12,889
-20,030
Tax
1,050
0
0
0
0
Profit after tax
1,950
-1,750
-6,938
-12,889
-20,030
Operating cash flow
3,950
250
-4,938
-10,889
-18,030
D. Working capital
Working capital
1,500
4,075
5,909
8,568
12,423
18,014
0
Change in working capital
1,500
2,575
1,834
2,659
3,855
5,590
-18,014
Cash flow from investment in working capital
-1,500
-2,575
-1,834
-2,659
-3,855
-5,590
18,014
E. Project valuation
Total project cash flow
-16,500
1,375
-1,584
-7,596
-14,745
-23,621
18,014
Add: Income from Sale of Fixed Asset
1300
Total Cash Flow
-16,500
1,375
-1,584
-7,596
-14,745
-23,621
19,314
Discount Factor
1
0.8929
0.7971
0.7116
0.6353
0.5672
0.5064
Dicounted Cash Flow
-16500
1228
-1262
-5406
-9367
-13398
9780
NPV
-34925
4. Optimistic NPV Working:
OPTIMISTIC
Year:
0
1
2
3
4
5
6
Operating cash flow
Revenues
15,000
17,250
19,838
22,813
26,235
Variable expenses
6,000
5,100
4,335
3,685
3,132
Fixed expenses
4,000
5,600
4,410
6,174
8,644
Depreciation
2,000
2,000
2,000
2,000
2,000
Pretax profit
3,000
4,550
9,093
10,954
12,459
Tax
1,050
1,593
3,182
3,834
4,361
Profit after tax
1,950
2,958
5,910
7,120
8,099
Operating cash flow
3,950
4,958
7,910
9,120
10,099
D. Working capital
Working capital
1,500
4,075
2,038
1,019
509
255
0
Change in working capital
1,500
2,575
-2,038
-1,019
-509
-255
-255
Cash flow from investment in working capital
-1,500
-2,575
2,038
1,019
509
255
255
E. Project valuation
Total project cash flow
-9,000
1,375
6,995
8,929
9,630
10,353
255
Add: Income from Sale of Fixed Asset
1300
Total Cash Flow
-9,000
1,375
6,995
8,929
9,630
10,353
1,555
Discount Factor
1
0.8929
0.7971
0.7116
0.6353
0.5672
0.5064
Dicounted Cash Flow
-9000
1228
5576
6354
6118
5872
787
NPV
16935
5. Sensitivity Analysis : let NPV be Zero.
We then calculate each value by assuming NPV = 0 and then compare it with related data.
a. Pessimistic:
1. Initial Investment : = -18425 = Sensitivity ( 16500/18425)*100 = 89.55%
2. Revenue = Initial Revenue = 27600 Hence Sesitivity =(12600/27600)*100= 45.65%
3. Variable Cost : 27600*40%= 11040 Hence sensitivity = (5040/11040)*100 = 45.65%
4. Fixed Cost = 40% * 15000=6000 Hence Sensitivity = ( 2000/6000)*100 = 33.33%
5. Working Capital = 15% *15000= 2,250 Hence Sensitivity = 750/2250*100 = 50%
Like wise we calculate this in each case.
Project NPV pessimistic expected optimistic Initial Investment 89.55 55.69 25.8 Revenues 45.65 66.67 Variable Cost 45.65 66.67 Fixed Cost 33.33 25 Working Capital 50 50Related Questions
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