CNCT ACC CORPORATE FINANCE
12th Edition
ISBN: 9781264604081
Author: Ross
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 7, Problem 12QAP
Summary Introduction
To determine: The sensitivity analysis if quantity sold is changed on operating cash flows.
Introduction: Sensitivity analysis is the method where the sensitivity of the project’s cash flow is checked with the changes in one variable. For instance, if the quantity sold is increasing or decreasing then the impact on the cash flows is analyzed.
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You are considering the following project. What is the NPV of the project? WACC of the project: 0.10 Revenue growth rate: 0.05 Tax rate: 0.40 Revenue for year 1: 13,000 Fixed costs for year 1: 3,000 variable costs (% of revenue): 0.30 project life: 3 years Economic life of equipment: 3 years Cost of equipment: 20,000 Salvage value of equipment: 4,000 Initial investment in net working capital: 2,000
Plot a sensitivity graph for annual worth versus initial cost, annual revenue, and salvage value for the data below. Vary only one
parameter at a time, each within the range of -20% to +20%. MARR is 3%/year. Project life is 4 years. Based on your graph, which
parameter shows the MOST sensitivity? Initial Cost: $120,000- Annual Revenue: $25,000 - Salvage Value: $35,000
O Cannot be determined
O Annual Revenue
O Initial Cost
O Salvage Value
To illustrate how a sensitivity analysis might be performed, we consider once more the SMP investment: a $500,000 initial investment, annual savings of $92,500 for a 10-year period, and a salvage value of $50,000. As before, a 10% MARR applies. Let’s consider how sensitive the annual worth for the investment is to errors in estimating the initial investment, the annual savings, the salvage value, the investment’s duration, and the MARR. Specifically, for an error range of ±50% for each parameter, what is the impact on AW?
Chapter 7 Solutions
CNCT ACC CORPORATE FINANCE
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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