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BWFF6013: Seminar In FinanceCase Study: The Lazy Mower: Is It Really Worth It?6Question 7Calculate the IRR of the project. Based on your calculations what would you recommend?Why? Based on the calculations, the IRR of the project is 61% and the weighted average cost of capitalis 14%, this project should be accepted. Moreover, IRR can be used to make decision whenevaluating a project which is if the IRR exceeds the firm’s cost of capital the project should beaccepted. Meanwhile, if it is less than the firm’s cost of capital it shall be rejected. Since the IRRcalculated is more than the cost of capital, it shows that the project is able to provide positivecash flows in the future. As for the worst case scenario, the computed IRR is 51.73% which stillexceeds the given cost of capital of 14%. And thus, it can be concluded that the project shall beaccepted as the IRR calculated for both scenarios of best and worse are greater than the cost ofcapital which is supported by a study done by Brigham and Ehrhardt (2009).Question 8How sensitive is the Net Present Value of the project to the cost of capital?0%20%40%60%80%100%120%(20,000,000.00)- 20,000,000.00 40,000,000.00 60,000,000.00 80,000,000.00 100,000,000.00 120,000,000.00 Sensitivity Analysis of NPV to Cost of CapitalNPVCost of CapitalNet Present Value
BWFF6013: Seminar In FinanceCase Study: The Lazy Mower: Is It Really Worth It?7The graph above shows the sensitivity analysis between net present value and cost of capital forthe project. It shows that there is a negative relationship between the net present value and thecost of capital which is the higher the cost of capital, the lower the net present value. Not onlythat, the net present value is seen to still have positive value when the cost of capital is below60%. When the cost of capital exceeds 60%, the net present value hit below 0. Moreover, thegraph indicates that the net present value was too sensitive when the net present value remainspositive to the cost capital. It was worth to the company since the net present value show thepositive result until cost of capital was 60%. But after that the net present value was lesssensitive when the net present value show the negative result (Nicholas H. Johnson 1, 2010).Moreover there were more sensitivity result reflected between the net present value and the costcapital since the IRR is more than cost of the capital.Question 9Calculate the operating leverage entailed by this project. What does it indicate?Operating Leverage¿quantity ×(price−variablecosts per unit)[quantity ×(price−variable costs perunit)]−¿costs¿30,000×(1000−400)[30,000×(1000−400)]−1,620,000¿1.0989
BWFF6013: Seminar In FinanceCase Study: The Lazy Mower: Is It Really Worth It?