L13_Project analysis

# L13_Project analysis - Financial Management Fall 2009...

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Unformatted text preview: Financial Management Fall 2009 Lecture 13: Project Analysis Professor Erica Li Ross School of Business Roadmap for today ! Continue our project analysis " Understand forecasting risk " Understand and be able to conduct scenario, sensitivity, and break-even analysis ! Textbook reading: chapter 11.1-11.5. Skip simulation analysis and accounting break-even 1 Forecasting risk ! NPV estimates are just estimates ! A positive NPV is a good start. But “is the estimate of the project reliable?” " Forecasting risk: how sensitive is the NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk ! We will use the Garmin FR 505 mini case to learn how to gauge the forecasting risk 2 What-if analysis ! Scenario analysis " What happens to the NPV under different cash flow scenario? " At the very least, look at: ! Best case: highest revenue, lowest costs, positive side effects, … ! Worst case: lowest revenue, highest costs, negative side effects, … ! Measure the range of possible outcomes ! Sensitivity analysis " How sensitive is the NPV to changes in one variable by freezing all other variables ! How does NPV change if the selling price changes? ! How does NPV change if the variable cost changes? ! …… 3 FR 505 - Revisited For simplicity, let’s make the following assumptions: ! The price and unit sales of FR 505 are the same for every year from 2010 to 2012 ! The life cycle of FR 405CX ends in 2012, instead of 2011 as in the original setup ! The price and unit sales of FR 405CX with or without FR 505 are the same every year Everything else is the same as described in the original case 4 Unit sales & prices Base case values in 2010, 2011, and 2012: Unit sales price FR 505 300,000 \$400 FR 405 CX w/o FR 505 200,000 \$370 FR 405 CX w/ FR 505 140,000 \$296 5 Uncertainty ! Assume that we are not certain about the price and variable costs of FR 505, but have an idea about the range of possible values Base Case Lower Bound Upper Bound Price per unit of FR 505 \$400 \$250 \$500 Variable costs per unit \$80 \$65 \$100 6 UOCF (I)...
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L13_Project analysis - Financial Management Fall 2009...

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