Project analysis_sol - Project Analysis: Suppose we want to...

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Project Analysis: Suppose we want to prepare a set of pro forma financial statements for a project for Norma Desmond Enterprises. In order to do so, we must have some background information. In this case, assume: a. Sales of 10,000 units/year @ $5/unit. b. Variable cost/unit is $3. Fixed costs are $5,000/year. Project has no salvage value. Project life is 3 years. c. Project cost is $21,000. Depreciation is $7,000/year. The project is financed with retained earnings. d. Investment in net working capital is $10,000. The NWC investment occurs at the beginning of the project, and it is assumed that all of NWC is converted into cash at the end of the project. e. The firm’s required return is 20%. The tax rate is 34%. 1. Calculate the project’s Payback, NPV, and IRR (base-case). 2. Scenario analysis: Suppose the company believes that all of its estimates (sale quantity, price, variable cost/unit, and fixed cost) are accurate within ±10 percent. What are the best-case NPV and IRR? Worst-case NPV and IRR? 3. Sensitivity analysis: Evaluate the sensitivity of the company’s base-case NPV to changes in price. Calculate the project’s NPV assuming a 10% price decline. 4. Break-even analysis: find the quantity for (a) accounting break-even (NI=0); (b) cash break-even (OCF=0); (c) financial break-even (NPV=0)? Solutions: 1) Base-Case Scenario Step 1: Construct the Pro Forma Income Statement Pro Forma Income Statements Sales $50,000 Var. costs 30,000 Fixed costs 5,000 Depreciation 7,000 EBIT $8,000 Taxes (34%) 2,720 Net income $5,280 Where: Sales=sales quantity x price per unit = 10,000 x 5 = $50,000
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This note was uploaded on 04/25/2010 for the course IE 654 taught by Professor Smith during the Spring '10 term at 카이스트, 한국과학기술원.

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Project analysis_sol - Project Analysis: Suppose we want to...

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