Question

1. Your boss wants you to conduct a sensitivity and scenario analysis to determine whether the following project is a winner. You are entering an established market, and you know the market size will be 1,100,000 units. You are unsure of your exact market share, the price you will be able to charge, and your variable cost per unit, but have determined a range of possible values for each (in the table below). Your initial investment cost is $150 million, and that investment will depreciate in straight-line form over the 20-year life of the project. There are no new NWC requirements, and there will be no salvage value at the end of the 20 years. The tax rate is 35%. The discount rate is 18%. Use the following table to conduct a full sensitivity analysis for the project. Make sure to include the NPV for the expected outcome as part of the full sensitivity analysis. Also add the best- and worst-case scenarios to the full sensitivity analysis. Show all of your work (written out, not an Excel file). Round to the nearest dollar.

	Pessimistic	Expected	Optimistic
Market Share	4.0%	5.0%	6.0%
Price/unit	$2310	$2500	$2690
VC/Unit	$2000	$1540	$1000
FC	$1.8 Million	$2 Million	$2.2 Million

Answer 1

Market Size=1100000 units

Initial Investment=$150000000

Time= 20 years

Tax=35%

Dicount Rate=18%

Particulars	Pessimistic	Expected	Optimistic
Market Share	4%	5%	6%
Units sold(Market size* Market Share)	44000	55000	66000
Price per unit	2310	2500	2690
VC per unit	2000	1540	1000
Sales(Units sold* Price per unit)	101640000	137500000	177540000
Less:- VC(Units sold* VC per unit)	88000000	84700000	66000000
Contribution	13640000	52800000	111540000
Less:- FC	1800000	2000000	2200000
EBDIT	11840000	50800000	109340000
Less:- Depreciation(150000000/20)	7500000	7500000	7500000
EBIT	4340000	43300000	101840000
Less:- Tax(EBIT*40%)	1519000	15155000	35644000
PAT	2821000	28145000	66196000
Present Value at 18% for 20 years	12796693.11	127672076.41	300280006.04
Less:- Initial Inestment	150000000	150000000	150000000
NPV	-$137203306.89	-$22327923.59	$150280006.04

NPV is positive in optimistic case.

If we have an equal chance of a pesimistic, expected and optimistic situation, so probability for each case=0.3334

So, expected NPV of the project=0.3334*-137203306.89+ 0.3334*-22327923.59+ 0.3334*150280006.04

                                                     =-$3083741.48

Since expected NPV is negative, we should not choose the project.