Question: The managers of a company are considering an investment with the following estimated cash flows. MARR is 15% per year.
Capital investment $30,000
Annual revenues $20,000
Annual expenses $5,000
Market value $1,000
Useful life 5 years
The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ±5%. Annual expenses are known to be within ±10%. The annual revenue, market value, and useful life estimates are known to be within ±20%.
a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management.
b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest need).