0 оценок0% нашли этот документ полезным (0 голосов)
151 просмотров5 страниц
This document provides solutions to questions from a business finance tutorial about forecasting risk, sensitivity analysis, scenario analysis, and net present value calculations. It includes examples of calculating the sensitivity of NPV to changes in sales and variable costs. The key points are:
- Forecasting risk is the risk of a poor decision due to errors in projected cash flows, which is greatest for new projects with harder to predict cash flows.
- A sensitivity analysis examines one variable over a broad range of values, while a scenario analysis examines all variables for a limited range of values.
- Calculating the change in NPV for a given change in a variable, like sales or costs, provides the sensitivity of NPV to that
Исходное описание:
FINS1613: Business Finance UNSW (University of New South Wales)
Tutorial Solutions
for Week 7 Tutorial 6
This document provides solutions to questions from a business finance tutorial about forecasting risk, sensitivity analysis, scenario analysis, and net present value calculations. It includes examples of calculating the sensitivity of NPV to changes in sales and variable costs. The key points are:
- Forecasting risk is the risk of a poor decision due to errors in projected cash flows, which is greatest for new projects with harder to predict cash flows.
- A sensitivity analysis examines one variable over a broad range of values, while a scenario analysis examines all variables for a limited range of values.
- Calculating the change in NPV for a given change in a variable, like sales or costs, provides the sensitivity of NPV to that
This document provides solutions to questions from a business finance tutorial about forecasting risk, sensitivity analysis, scenario analysis, and net present value calculations. It includes examples of calculating the sensitivity of NPV to changes in sales and variable costs. The key points are:
- Forecasting risk is the risk of a poor decision due to errors in projected cash flows, which is greatest for new projects with harder to predict cash flows.
- A sensitivity analysis examines one variable over a broad range of values, while a scenario analysis examines all variables for a limited range of values.
- Calculating the change in NPV for a given change in a variable, like sales or costs, provides the sensitivity of NPV to that
Question 1 Forecasting risk is the risk that a poor decision is made because of errors in projected cash flows. The danger is greatest with a new project because the cash flows are probably harder to predict.
Question 2 With a sensitivity analysis, one variable is examined over a broad range of values. With a scenario analysis, all variables are examined for a limited range of values.
Question 3
Question 4 The base-case, best-case, and worst-case values are shown below. Remember that in the best- case, sales and price increase, while costs decrease. In the worst case, sales and price decrease, and costs increase.
Scenario Unit Sales Unit Price Unit Variable Cost Fixed Costs Base case 80,000 $1,280 $340 $5,500,000 Best case 92,000 $1,472 $289 $4,675,000 Worst case 68,000 $1,088 $391 $6,325,000
Question 5 a. We will use the tax shield approach to calculate the OCF. The OCF is:
OCF base = [(P v)Q FC](1 T C ) + T C D OCF base = [(($36.50 22.75)(95,000)) $830,000](0.70) + 0.30($1,440,000/6) OCF base = $405,375
Now we can calculate the NPV using our base-case projections. There is no salvage value or NWC, so the NPV is:
NPV base = $1,440,000 + $405,375(PVIFA 13%,6 ) NPV base = $180,506.75
To calculate the sensitivity of the NPV to changes in the quantity sold, we will calculate the NPV at a different quantity. We will use sales of 100,000 units. The NPV at this sales level is:
OCF new = [($36.50 22.75)(100,000) $830,000](0.70) + 0.30($1,440,000/6) OCF new = $453,500
And the NPV is:
NPV new = $1,440,000 + $438,250(PVIFA 13%,6 ) NPV new = $372,888.83
So, the change in NPV for every unit change in sales is:
If sales were to drop by 500 units, then NPV would drop by:
NPV drop = $35.728(500) NPV drop = $19,238.21
You may wonder why we chose 100,000 units. Because it doesnt matter! Whatever sales number we use, when we calculate the change in NPV per unit sold, the ratio will be the same.
b. To find out how sensitive OCF is to a change in variable costs, we will compute the OCF at a variable cost of $21.75. Again, the number we choose to use here is irrelevant: We will get the same ratio of OCF to a one dollar change in variable cost no matter what variable cost we use. So, using the tax shield approach, the OCF at a variable cost of $21.75 is:
OCF new = [($36.50 21.75)(95,000) $830,000](0.70) + 0.30($1,440,000/6) OCF new = $471,875
So, the change in OCF for a $1 change in variable costs is:
If variable costs decrease by $1 then, OCF would increase by $66,500.
Question 6 The option to abandon reflects our ability to reallocate assets if we find our initial estimates were too optimistic. The option to expand reflects our ability to increase cash flows from a project if we find our initial estimates were too pessimistic. Since the option to expand can increase cash flows and the option to abandon reduces losses, failing to consider these two options will generally lead us to underestimate a projects NPV.
Question 11 Calculate the NPV and the Equivalent Annual Annuity (EAA) of each bus. Choose the bus with the lowest costs. The timeline of the investment opportunity is: 0 1 2 3 4 5 6 7
Old Reliable 200 4 4 4 4 4 4 4 Short & Sweet 100 2 2 2 2
Old Reliable 7 4 1 NPV 200 1 0.11 (1 0.11) 218.85
= +
+
=
Old Reliable 7 Old Reliable EAA 1 218.85 1 0.11 (1 0.11) EAA 46.44
=
+
=
Short and Sweet 4 2 1 NPV 100 1 0.11 (1 0.11) 106.20
= +
+
=
Short and Sweet 4 Short and Sweet EAA 1 106.20 1 0.11 (1 0.11) EAA 34.23
=
+
=
The annual cost of the Short and Sweet bus is less, so they should buy this bus.
Question 12 We need to evaluate the free cash flows associated with each alternative. Note that we only need to include the components of free cash flows that vary across each alternative. For example, since NWC is the same for each alternative, we can ignore it.
The spreadsheet below calculates the relevant FCF from each alternative. Note that each alternative has a negative NPVthis represents the PV of the costs of each alternative. We should choose the one with the highest NPV (lowest cost), which in this case is purchasing the existing machine. 0 1 - 7 8 - 10 Rent Machine 1 Rent (50,000) (50,000) 2 FCF (rent) (35,000) (35,000) 3 NPV at 8% (234,853) Purchase Current Machine 4 Maintenance (20,000) (20,000) 5 Depreciation 21,429 6 Capital Expenditures (150,000) 7 FCF (purchase current) (150,000) (7,571) (14,000) 8 NPV at 8% (210,469) Purchase Advanced Machine 9 Maintenance (15,000) (15,000) 10 Other Costs (35,000) 10,000 10,000 11 Depreciation 35,714 12 Capital Expenditures (250,000) 13 FCF (purchase advanced) (274,500) 7,214 (3,500) 14 NPV at 8% (242,204)
When evaluating a capital budgeting project, financial managers should make the decision that maximises NPV. In this case, Beryls Iced Tea should purchase the current machine because it has the lowest negative NPV.