Exercise_21-29_Solution

Exercise_21-29_Solution - 21-29 (20 min.) DCF, sensitivity...

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Unformatted text preview: 21-29 (20 min.) DCF, sensitivity analysis, no income taxes. 1. Revenues, $25 × 1,000,000 Variable cash costs, $10 × 1,000,000 Cash contribution margin Fixed cash costs Cash inflow from operations $10,000,000 $25,000,000 10,000,000 15,000,000 5,000,000 Net present value: Cash inflow from operations: $10,000,000 × 3.433 Cash outflow for initial investment Net present value $34,330,000 (30,000,000) $ 4,330,000 2a. 5% reduction in selling prices: Revenues, $23.75 × 1,000,000 Variable cash costs, $10 × 1,000,000 Cash contribution margin Fixed cash costs Cash inflow from operation $ 8,750,000 $23,750,000 10,000,000 13,750,000 5,000,000 Net present value: Cash inflow from operations: $8,750,000 × 3.433 Cash outflow for initial investment $30,038,750 (30,000,000) Net present value $ 38,750 b. 5% increase in the variable cost per unit: Revenues, $25 × 1,000,000 Variable cash costs, $10.50 × 1,000,000 Cash contribution margin Fixed cash costs Cash inflow from operations $ 9,500,000 $25,000,000 10,500,000 14,500,000 5,000,000 Net present value: Cash inflow from operations: $9,500,000 × 3.433 Cash outflow for initial investment Net present value $32,613,500 (30,000,000) $ 2,613,500 3. Sensitivity analysis enables management to see those assumptions for which input variations have sizable impact on NPV. Extra resources could be devoted to getting more informed estimates of those inputs with the greatest impact on NPV. Sensitivity analysis also enables management to have contingency plans in place if assumptions are not met. For example, if a 5% reduction in selling price is viewed as occurring with 0.40 probability, management may wish to line up bank loan facilities. ...
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Exercise_21-29_Solution - 21-29 (20 min.) DCF, sensitivity...

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