# MK2 CH 11 - PROJECT ANALYSIS AND EVALUATION CHAPTER 11...

This preview shows pages 1–8. Sign up to view the full content.

PROJECT ANALYSIS AND EVALUATION CHAPTER 11

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
EVALUATING NPV ESTIMATES PROJECTED vs ACTUAL CASH FLOWS PROJECTION IS BASED ONLY ON WHAT WE KNOW TODAY NOT REALLY EXPECT A PROJECTED CASH LOW TO BE EXACTLY RIGHT FORECASTING RISK
FORECASTING RISK OR ESTIMATION RISK THE POSSIBILITY THAT WE WILL MAKE A BAD DECISION BECAUSE OF ERRORS IN THE PROJECTED CASH LOWS HOW IS THIS POSSIBLE ? IF OVERLY OPTIMISTIC OR PESIMISTIC AS A RESULT PROJECTED CASH FLOWS DON’T REALISTICALLY REFLECT THE POSSIBLE FUTURE CASH FLOWS

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
POSSIBILITY OF ERRORS IN FORECAST TO DEVELOP SOME TOOLS THAT ARE USEFUL IN IDENTIFYING AREAS WHERE POTENTIAL ERROR EXIST AND WHERE MIGHT BE DAMAGING WHAT IF ANALYSIS 1. SCENARIO ANALYSIS 2. SENSITIVITY ANALYSIS 3. SIMULATION ANALYSIS
GETTING STARTED BASE CASE LOWER BOUND UPPER BOUND UNIT SALES 6.000 5,500 6,500 PRICE PER UNIT \$80 \$75 \$85 VC PER UNIT \$60 \$58 \$62 FC PER YEAR \$50,000 \$45,000 \$55,00 BASE CASE SALES \$480,000 VARIABLE COST 360,000 FIXED COST 50,000 DEPRECIATI ON 40,000 EBIT \$ 30,000 TAXES (34%) 10,200 PROJECT COSTS \$200,000, HAS A FIVE-YEAR LIFE, AND HAS NO SALVAGE VALUE, DEPRECIATION IS STRAIGHT-LINE TO ZERO, REQUIRED RATE OF RETURN 12%, TAX RATE 34% BASE CASE NPV : \$15,567

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
SCENARIO ANALYSIS THE DETERMINATION OF WHAT HAPPENS TO NPV ESTIMATES WHEN WE ASK WHAT-IF QUESTIONS THERE ARE NUMBER OF POSSIBLE SCENARIOS WE CAN CONSIDER
EXAMPLE: SCENARIO ANALYSIS WORST AND BEST CASE WORST CASE BEST CASE UNIT SALES 5,500 6,500 PRICE PER UNIT \$75 \$85 VC PER UNIT \$62 \$58 FC PER UNIT \$55,000 \$45,000 SCENARIO NET INCOME CASH FLOW NPV IRR BASE CASE \$19,000 \$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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/02/2010 for the course ACCOUNTING 10835 taught by Professor 123 during the Spring '10 term at Abu Dhabi University.

### Page1 / 20

MK2 CH 11 - PROJECT ANALYSIS AND EVALUATION CHAPTER 11...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online