NPV in an uncertain context

NPV in an uncertain context - NPV in an uncertain context...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
NPV in an uncertain context Projected cash flows and risk of the project
Background image of page 1

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

View Full DocumentRight Arrow Icon
Projected cash flows So far, we’ve supposed that we live in a context of certainty and we know for sure, what will be the cash flows in a project. In reality, the only relatively certain cash flow in a project in the initial investment. As for the other CFs, we estimate based on our information about the market TODAY. For example, in project A, we estimate an annual gross sales of 275 000$ for the next 5 years. What if we enter a period of recession in 2 years….or a period of economic expansion? What if new competitors appear on the market….or several competitors leave the market?
Background image of page 2
Methods Sensitivity Analysis Scenarios Analysis Simulation Analysis Break-Even Analysis
Background image of page 3

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

View Full DocumentRight Arrow Icon
Example Initial Investment = 200 000$ Production = 6 000 units/year Market price = 80$/unit Variable cost = 60$/ unit Fixed cost = 50 000$/year Corporate tax rate = 34% Project period = 5 years Linear CCA at 20% = 40 000$/year
Background image of page 4
Basic estimation (Normal situation) Sales (6000 x 80) 480 000 $ VC (6000 x 60) (360 000) FC (50 000) CCA (40 000) ------------------------------------------------------ EBIT 30 000 Tax (10 200) ----------------------------------------------------- Net Income 19 800 OCF = 19 800 + 40 000 = 59 800 $ NPV = 15 565 $
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/10/2011 for the course FM 311 taught by Professor Hasd during the Summer '11 term at Laurentian.

Page1 / 21

NPV in an uncertain context - NPV in an uncertain context...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online