Problem 4–3 (Advanced Topics—Sensitivity Analysis)Santa Ana, Inc. has a 6% cost of capital. The firm decides to invest in equipment that costs $250,000. Santa Ana, Inc. forecasts that the project will generate $33,000 of annual cash inflow in each of the next eleven years.(Note that the present value for i = 6% and n = 10 is 7.36009 and for i = 6% and n = 11 is 7.8887.)Required: Using Excel formulas, compute the project’s net present value (NPV) and internal rate of return (IRR).State the reason why Santa Ana, Inc. should or should not make the investment.Use sensitivity analysis to determine:The maximum hurdle rate that could exist before Santa Ana, Inc. rejects the investment.The minimum annual cash flow that Santa Ana could generate and still invest in the project.The minimum number of years that Santa Ana could generate a $33,000 annuity and still invest in the project.

The question is based on the concept of the valuation model.

Answered: Santa Ana, Inc. has a 6% cost of…

EBK CFIN

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ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

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Problem 4–3 (Advanced Topics—Sensitivity Analysis)

Santa Ana, Inc. has a 6% cost of capital. The firm decides to invest in equipment that costs $250,000. Santa Ana, Inc. forecasts that the project will generate $33,000 of annual cash inflow in each of the next eleven years.

(Note that the present value for i = 6% and n = 10 is 7.36009 and for i = 6% and n = 11 is 7.8887.)

Required:

Using Excel formulas, compute the project’s net present value (NPV) and internal rate of return (IRR).
State the reason why Santa Ana, Inc. should or should not make the investment.
Use sensitivity analysis to determine:

The maximum hurdle rate that could exist before Santa Ana, Inc. rejects the investment.
The minimum annual cash flow that Santa Ana could generate and still invest in the project.
The minimum number of years that Santa Ana could generate a $33,000 annuity and still invest in the project.

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