You are considering a five-year project with initial investment of $40,446.46. The required return is 9%.The following are the estimates which are the same for each of the five-year period. Base Case 3,100 $19 $12 Lower Bound 2,500 $16 $10 Upper Bound 3,400 $22 $14 Unit sales Sales prise Variable ocst per enit Fized ocets $8,200 $7,800 $8,500 The depreciation is $7,600 a year and the tax rate is 34%. Assume operating cash flows (OCF) are the only incremental cash flows of the project. a) Conduct a sensitivity analysis to compare the base and the worst case of the unit sales to investigate the effect on OCF and NPV. b) Explain if you want to forgo this project based on sensitivity analysis.
You are considering a five-year project with initial investment of $40,446.46. The required return is 9%.The following are the estimates which are the same for each of the five-year period. Base Case 3,100 $19 $12 Lower Bound 2,500 $16 $10 Upper Bound 3,400 $22 $14 Unit sales Sales prise Variable ocst per enit Fized ocets $8,200 $7,800 $8,500 The depreciation is $7,600 a year and the tax rate is 34%. Assume operating cash flows (OCF) are the only incremental cash flows of the project. a) Conduct a sensitivity analysis to compare the base and the worst case of the unit sales to investigate the effect on OCF and NPV. b) Explain if you want to forgo this project based on sensitivity analysis.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...
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Transcribed Image Text:You are considering a five-year project with initial investment of $40,446.46. The
required return is 9%.The following are the estimates which are the same for each of
the five-year period.
Upper Bound
3,400
$22
$14
Base Case
Unit sales
Salea prise
Variable ocst par onif
Fized oosts
3,100
$19
$12
Lower Bound
2,500
$16
$10
$8,200
$7,800
$8,500
The depreciation is $7,600 a year and the tax rate is 34%. Assume operating cash flows
(OCF) are the only incremental cash flows of the project.
a) Conduct a sensitivity analysis to compare the base and the worst case of the unit sales
to investigate the effect on OCF and NPV.
b) Explain if you want to forgo this project based on sensitivity analysis.
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