There is no salvage depreciation is straight line the

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Unformatted text preview: eciation is straight-line, the required return is 12%, and the tax rate is 34% tax The base case NPV is 15,567 6 Summary of Scenario Analysis Scenario Net Income Cash Flow NPV IRR Base case 19,800 59,800 15,567 15.1% Worst Case -15,510 24,490 -111,719 -14.4% Best Case 59,730 99,730 159,504 40.9% 7 Sensitivity Analysis What happens to NPV when we vary one What variable at a time variable This is a subset of scenario analysis where we This are looking at the effect of specific variables on NPV NPV The greater the volatility in NPV in relation to a The specific variable, the larger the forecasting risk associated with that variable, and the more attention we want to pay to its estimation attention 8 Summary of Sensitivity Analysis for Summary New Project New Scenario Unit Sales Cash Flow NPV IRR Base case 6000 59,800 15,567 15.1% Worst case 5500 53,200 -8,226 10.3% Best case 6500 66,400 39,357 19.7% 9 Simulation Analysis Simulation is really just an expanded sensitivity and Simulation scenario analysis scenario Monte Carlo simulation can estimate thousands of Monte possible outcomes based on conditional probability distributions and constraints for each of the variables distributions The output is a probability distribution for NPV with an The estimate of the probability of obtaining a positive net present value present The simulation only works as well as the information that The is entered and very bad decisions can be made if care is not taken to analyze the interaction between variables not 10 10 Making A Decision Beware “Paralysis of Analysis” At some point you have to make a decision If the majority of your scenarios have positive If NPVs, then you can feel reasonably comfortable about accepting the project comfortable If you have a crucial variable that leads to a If negative NPV with a small change in the estimates, then you may...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.

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