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Unformatted text preview: FNCE 3010 (Durham). HW18 capital budgeting 3 1. What is the main difference between sensitivity analysis and scenario analysis? Solution: With a scenario analysis, changes in several variables at a time are considered. With a sensitivity analysis, only a single variable is changed. 2. A project has the following estimated data: price = $70 per unit; variable costs = $37 per unit; fixed costs = $6,000; required return = 15 percent; initial investment = $12,000; life = four years. Use straight-line depreciation over four years, and assume the project has no salvage value. Assume the tax rate is 34%. What is the accounting break-even quantity? The cash break-even quantity (ignoring the depreciation tax shield)? The financial break-even quantity? Solution: Accounting break-even is Q = (FC + D) / (P - VC) = (6000 + 3000) / (70 - 37) = 273 Cash break-even is: Q = FC / (P - VC) = 6000 / (70 - 37) = 182 To solve for the financial break-even, we first solve for the required OCF. Use your calculator with PV=-12000, n=4, r=15%, FV=0. You should get PMT =your calculator with PV=-12000, n=4, r=15%, FV=0....
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- Fall '07
- Corporate Finance