As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project’s life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACC is 11%. The CFO asks you to do a scenario analysis using these inputs: Scenario Probability Unit Sales VC% Best case 25% 4,800 65% Base case 50 4,000 70 Worst case 25 3,200 75 Other variables are unchanged. What are the expected NPV, its standard deviation, and the coefficient of variation? (Hint: To do the scenario analysis, you must change unit sales and VC% to the values specified for each scenario, get the scenario cash flows, and then find each scenario’s NPV. Then you must calculate the project’s expected NPV, standard deviation (σ), and coefficient of variation (CV). NPV Best Case Scenario = $ . NPV Base Case Scenario = $ . NPV Worst-case Scenario = - $ . Expected NPV = $ Standard deviation of NPV = $ Coefficient of variation of NPV =

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1lM

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As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project’s life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACC is 11%.

The CFO asks you to do a scenario analysis using these inputs:

Scenario	Probability	Unit Sales	VC%
Best case	25%	4,800	65%
Base case	50	4,000	70
Worst case	25	3,200	75

Other variables are unchanged.

What are the expected NPV, its standard deviation, and the coefficient of variation? (Hint: To do the scenario analysis, you must change unit sales and VC% to the values specified for each scenario, get the scenario cash flows, and then find each scenario’s NPV. Then you must calculate the project’s expected NPV, standard deviation (σ), and coefficient of variation (CV).

NPV Best Case Scenario = $ .
NPV Base Case Scenario = $ .
NPV Worst-case Scenario = - $ .
Expected NPV = $
Standard deviation of NPV = $
Coefficient of variation of NPV =

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