3.2. Risk Analysis and Project evaluation: A firm expects to sell 600,000 units of the new product for an average price of $15 per unit. The Equipment in Option B has a residual value of $300 000 at the end of the project. The company will need to add $ 750 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Initial Investment = 1,500,000 Depreciation method: straight line Variable cost per unit: $10.5 Cash fixed costs per year: $25 000 Discount rate: 9% Tax Rate: 30% NPV= -1402759 time = 5 years Upon consideration of unexpected economic conditions, the company management requires your Team to prepare a risk analysis to evaluate the outcome of potential project when the values drivers of the project changes by 20%. Required: identify the value drivers of the project cash flows, do a sensitivity analysis and provide the management with a sensitive analysis report which shows how net present value (NPV) would change with 20% change in the value drivers.
3.2. Risk Analysis and Project evaluation:
A firm expects to sell 600,000 units of the new product
for an average price of $15 per unit. The Equipment in Option B has a residual value of $300 000 at
the end of the project. The company will need to add $ 750 000 in working capital which is expected
to be fully retrieved at the end of the project. Other information is available below:
Initial Investment = 1,500,000
Variable cost per unit: $10.5
Cash fixed costs per year: $25 000
Discount rate: 9%
Tax Rate: 30%
NPV= -1402759
time = 5 years
Upon consideration of unexpected economic conditions, the company management requires your
Team to prepare a risk analysis to evaluate the outcome of potential project when the values drivers
of the project changes by 20%.
Required: identify the value drivers of the project cash flows, do a sensitivity analysis and provide
the management with a sensitive analysis report which shows how
change with 20% change in the value drivers.
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