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
You've reached the end of your free preview.
Want to read all 9 pages?