Ch11 - Ch11. Project Analysis and Evaluation 1) Scenario...

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Ch11. Project Analysis and Evaluation
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1) Scenario and other what-if analyses Actual cash flows and projected cash flows. Forecasting risks. (1) Scenario analysis. In order to handle the possible errors in estimating cash flows, re-estimate cash flows or others under various circumstances/economic scenario.
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Ex) The project costs $200,000 and has a 5-year life. It does not have salvage value. Straight-line depreciation is applied. The required rate is 12% and tax rate is 34% Base Worst Best Unit Sales 6,000 5500 6500 Price per Unit 80 75 85 Variable costs per unit 60 62 58 Fixed costs per year 50,000 55000 45000 Sales 480,000 412,500 552,500 Total variable costs 360,000 341,000 377,000 Fixed costs per year 50,000 55,000 45,000 Depreciation 40,000 40,000 40,000 EBIT 30,000 (23,500) 90,500 Tax (34%) 10,200 0 30,770 Net Income 19,800 (23,500) 59,730 Operating cash flow 59,800 16,500 99,730 Project cost 200,000 200,000 200,000 NPV $15,565.62 ($140,521.19) $159,504.33
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2) Sensitivity analysis Analysis to figure out a key determinant to estimates in analysis, assuming other variables are constant. Among the variables, sale is usually found more significant than others. Base Worst Best Sales 480,000 412,500 552,500 Operating cash flow 59,800 32,500 87,850 Project cost 200,000 200,000 200,000 NPV $15,565.62 ($82,844.77) $116,679.59 Base Worst Best Fixed costs per year 50,000 55,000 45,000 Operating cash flow 59,800 56,500 63,100 Project cost 200,000 200,000 200,000 NPV $15,565.62 $3,669.86 $27,461.38
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3) Simulation analysis: A combination of scenario and sensitivity analyses. 4) Cost structures Variable costs (VC): costs that change when the quantity of output changes. Ex) direct labor costs and raw material costs. VC = v × Q
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Fixed costs (FC): costs that do not change when the quantity of output changes during a particular time period.
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Ch11 - Ch11. Project Analysis and Evaluation 1) Scenario...

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