Based on the inputs below prepare a capital budget analysis for this Base Case using the Net Present Value, Internal Rate of Return and Profitability Index determining whether the project is feasible. Please show your spreadsheet calculations and your final determinations of “go” or “no go” on the project.
Project Inputs:
WACC – the cost of capital (hurdle rate) will be the current yield of the 10 Year U.S. Treasury Note: as of Friday July 18 2014 the yield was 2.54%, plus 630 basis points.
Project Investment Outlay, Year 0 - $500,000 Project Investment Life – 10 years
Project Depreciation - $50,000 / year
Project Salvage Value - $20,000
Working Capital Base of Annual Sales – 10%
Expected inflation rate per year, Selling Price Per Unit – 5%
Expected inflation rate per year, Manufacturing Cost per unit – 3.5% Expected inflation rate per year, Fixed operating costs per year – 2.5% Project Tax Rate – 30%
??
Bus 530 Case 3: Hasse
Inputs continued:
Units sold per year – 20,000
Selling Price per Unit, Year 1 - $75
Fixed operating costs per year excluding depreciation - $250,000 Manufacturing costs per unit, Year 1 - $33.75
Scenario Analysis:
Base Case Scenario – 20,000 units sold per year – 57% probability Worst Case Scenario – 10,000 units sold per year – 25% probability Best Case Scenario – 30,000 units solder per year – 18% probability
Prepare a scenario analysis once you have completed your original discounted cash flow analysis. Is the project still a “go” or “no go”?
Sensitivity Analysis:
In addition to the above, also prepare a sensitivity analysis based on the following variables –
Deviation from the Base: -20%, -10%, 0%, +10%, +20%
Sensitivity Variables: (1). Selling Price per Unit, (2). Manufacturing Cost per Unit, (3). Depreciation.
Please show the range in the NPVs for each variable and chart the analysis. Which variable has the highest risk and which variable has the lowest risk? Explain.