And oe 48m 44m 4m positive npv gives money to the

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