External Financing Needed = projected assets – projected liabs. and OE = $4.8M - $4.4M = $.4M
Positive npv gives money to the firm
Negative npv takes money away
What leads to good npv
Economies of scale – large enough to sell for less
Product differentiation
Cost advantages – making a product cheaper than other people
Accounting Break-even
Where NI = 0
Q = (FC + D)/(P – v)
Cash Break-even
Where OCF = 0

Q = (FC + OCF)/(P – v); (ignoring taxes)
Financial Break-even
Where NPV = 0
Sensitivity analysis
•
What happens to NPV when we change one variable at a time
•
This is a subset of scenario analysis where we are looking at the effect of specific variables on
NPV
•
The greater the volatility in NPV in relation to a specific variable, the larger the forecasting risk
associated with that variable, and the more attention we want to pay to its estimation
Scenario analysis
•
What happens to the NPV under different cash flow scenarios?
•
At the very least, look at:
Best case – high revenues, low costs
Worst case – low revenues, high costs
Measure of the range of possible outcomes
Best case and worst case are not necessarily probable, but they can still be possible
Simulation analysis is really just an expanded sensitivity and scenario analysis
•
Monte Carlo simulation can estimate thousands of possible outcomes based on conditional
probability distributions and constraints for each of the variables
•
The output is a probability distribution for NPV with an estimate of the probability of obtaining a
positive net present value
•
The simulation only works as well as the information that is entered, and very bad decisions can
be made if care is not taken to analyze the interaction between variables

Operating leverage is the relationship between sales and operating cash flow
•
Degree of operating leverage measures this relationship
The higher the DOL, the greater the variability in operating cash flow
The higher the fixed costs, the higher the DOL
DOL depends on the sales level you are starting from
DOL = 1 + (FC / OCF)
•
Capital rationing occurs when a firm or division has limited resources
Soft rationing – the limited resources are temporary, often self-imposed
Hard rationing – capital will never be available for this project
The profitability index is a useful tool when a manager is faced with soft rationing

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- Spring '17
- MelvinStith
- Corporate Finance, Debt, Sales, Net Income, Profit margin, TA, total assets