Chapter11_s - 4/14/10 Chapter 11 project analysis and...

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4/14/10 Chapter 11 project analysis and Objectives Understand scenario and sensitivity analysis Understand the various forms of break-even analysis Understand operating leverage Understand capital rationing and its effects
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4/14/10 Evaluating NPV estimate Scenario analysis: What happens to the NPV under different cash flow scenarios? At the very least, look at: Best case – high revenues, low costs Worst case – low revenues, high costs Measure of the range of possible outcomes Sensitivity analysis: What happens to NPV when we change one variable at a time Forecasting risk – how sensitive is our NPV to changes in 11-2
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4/14/10 New Project Example Consider the project discussed in the excel below. The initial cost is $200,000, and the project has a 5- year life. There is no salvage. Depreciation is straight-line, the required return is 12%, and the tax rate is 34%. 11-3 Scenario Net Income Operating Cash Flow NPV IRR Base case 19,800 59,800 15,567 15.1% Worst Case -15,510 24,490 -111,719 -14.4% Best Case 59,730 99,730 159,504 40.9%
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Summary of Sensitivity Analysis for New Project 11-4
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4/14/10 Simulation Analysis
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Chapter11_s - 4/14/10 Chapter 11 project analysis and...

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