HW3_Answers - Big B Coffee Shop(1 Provided Workbook CB123...

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Unformatted text preview: Big B Coffee Shop (1) Provided Workbook: CB123 Relevant Readings:"Discounted Cash Flow Modeling" folder + Textbook Chapter 7. This assignment can (but does not have to) be done in team of maximum 3 students. account is used) Consider Big B Coffee Shop from the previous homework (see provided Workbook). Big B now realizes that some of the assumptions made are not totally correct. For example, even though projected decrease in operating expenses is $5,415, past experience from other users indicates that operating expenses can vary significantly from year to year. Big B's CFO has come to the conclusion that decrease in operating expenses will most likely follow a normal distribution with a mean of $5,415 and a standard deviation of $500. Increase in revenues will also depend on the overall state of the economy. Analysts believe that the increase in sales is not going to be less than $11,490 but if the economy is doing well, the increase in sales could be much higher. Big B's CFO decided to use a uniform distribution with a minimum of $10,341 and a maximum of $14,937 to model the increase in sales variable. Finally, a discount on the purchase price of the new machine can be negotiated. Most likely, the discount will follow a uniform distribution with a minimum of $1,000 and a maximum of $5,000. Big B's CFO wants to evaluate how these uncertain variables might affect the company's investment decision. The company needs to know the expected NPV and IRR of the project, which variables have the most influence on those values, and how uncertainty can be reduced. Big B Coffeeshop (2) Provided Workbook: CB123 Relevant Readings:"Discounted Cash Flow Modeling" folder + Textbook Chapter 7. This assignment can (but does not have to) be done in team of maximum 3 students. Identify the team members in the "ID" worksheet (first name should identify the student whose LonCapa account is used) Consider Big B Coffee Shop from the previous homework (see provided Workbook). Big B now realizes that some of the assumptions made are not totally correct. For example, a discount on the purchase price of the new machine can be negotiated. Most likely, the discount will follow a uniform distribution with a minimum of $1,000 and a maximum of $5,000. Also, the actual salvage value of the new equipment at the end of its life is most likely going to be $18,050 but it could range from $11,050 to $25,050 depending on the technological advancements in the industry. Big B's CFO proposed to use a triangular distribution to model the sale price of the new equipment in six years. Finally, the weighted average cost of capital is expected to vary on a yearly basis following a lognormal distribution with a mean of 10% and a standard deviation of 4%....
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This note was uploaded on 10/07/2011 for the course ECON 101 taught by Professor Ramiz during the Spring '11 term at Abilene Christian University.

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HW3_Answers - Big B Coffee Shop(1 Provided Workbook CB123...

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