Problem: The below has the inputs and capital budget net cash flows analysis for an investment of $1,000,000 over 10 years, with a WACC of 7.67%.
Question 1) Calculate the Net Present Value, IRR, Profitability Index and Payback Years for this capital budget.
Question 2) Prepare a scenario analysis with the following data:
a) Base Case (average scenario)= 25,000 units sold per year= 55% probability
b) Worst case scenario= 18,750 units sold per year- 25% probability
c) Best Case scenario= 31,250 units sold per year- 20% probability
d) Determine the scenario analysis for NPV and IRR?
e) What does the Risk assessment tell you about the project?
| Inputs |
|
|
Base Case |
| Equipment Costs |
|
|
$1,000,000 |
| Project life, straight line depreciation |
|
|
10 years |
| Salvage Value |
|
|
$100,000.00 |
| Units sold every year |
|
|
$25,000.00 |
| Sales price per unit, year 1 |
|
|
$12.50 |
| Annual change in sales price, after year 1 |
|
2.50% |
| Variable cost per unit (VC), Year 1 |
|
|
$6.25 |
| Annual change in VC after year 1 |
|
|
2.00% |
| Fixed Cost (FC), year 1 |
|
|
$50,000 |
| Annual change in FC, after year 1 |
|
|
1.00% |
| Project WACC |
|
|
7.67% |
| Tax Rate |
|
|
20% |
| Working Capital as % of next year's sales |
|
13% |