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NPV in an uncertain context

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

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NPV in an uncertain context Projected cash flows and risk of the project

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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?
Methods Sensitivity Analysis Scenarios Analysis Simulation Analysis Break-Even Analysis

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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
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 \$

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

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