Question

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Chapter 10.3 Blooper’s analysts have come up with the following revised estimates for its magnoosium mine:...

Chapter 10.3

Blooper’s analysts have come up with the following revised estimates for its magnoosium mine:

Range

Pessimistic Optimistic
Initial investment + 40 % 15 %
Revenues 15 % + 20 %
Variable costs + 25 % 20 %
Fixed cost + 40 % 20 %
Working capital + 45 % 25 %

Conduct a sensitivity analysis for each variable and range and compute the NPV for each. Use Spreadsheet 10.1 and accompanying data as a starting point for the analysis. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in thousands rounded to the nearest whole dollar.)

A. Inputs
Initial investment ($ thousands) 10,000
Salvage value ($ thousands) 2,000
Initial revenues ($ thousands) 15,000
Variable costs (% of revenues) 40.0%
Initial fixed costs ($ thousands) 4,000
Initial total expenses ($ thousands) 10,000
Inflation rate (%) 5.0%
Discount rate (%) 12.0%
Receivables (% of sales) 16.7%
Inventory (% of next year's costs) 15.0%
Tax rate (%) 35.0%
Year: 0 1 2 3 4 5 6
B. Fixed assets
Investments in fixed assets 10,000
Sales of fixed assets 1,300
Cash flow from fixed assets -10,000 1,300
C. Operating cash flow
Revenues 15,000 15,750 16,538 17,364 18,233
Variable expenses 6,000 6,300 6,615 6,946 7,293
Fixed expenses 4,000 4,200 4,410 4,631 4,862
Depreciation 2,000 2,000 2,000 2,000 2,000
Pretax profit 3,000 3,250 3,513 3,788 4,078
Tax 1,050 1,138 1,229 1,326 1,427
Profit after tax 1,950 2,113 2,283 2,462 2,650
Operating cash flow 3,950 4,113 4,283 4,462 4,650
D. Working capital
Working capital 1,500 4,075 4,279 4,493 4,717 3,039 0
Change in working capital 1,500 2,575 204 214 225 -1,679 -3,039
Cash flow from investment in working capital -1,500 -2,575 -204 -214 -225 1,679 3,039
0.408 0.408 0.408 0.408 0.250
E. Project valuation
Total project cash flow -11,500 1,375 3,909 4,069 4,238 6,329 4,339

Solutions

Expert Solution

Sensitivity Analysis of Initial Investment Pessimistic Optimistic
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Revenue 15,000 15,750 16,538 17,364 18,233 15,000 15,750 16,538 17,364 18,233
Less: Variable expenses 6,000 6,300 6,615 6,946 7,293 6,000 6,300 6,615 6,946 7,293
Less: Fixed Expenses 4,000 4,200 4,410 4,631 4,862 4,000 4,200 4,410 4,631 4,862
Less: Depreciation 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Pre tax Profit 3,000 3,250 3,513 3,787 4,078 3,000 3,250 3,513 3,787 4,078
Tax 1,050 1,138 1,229 1,326 1,427 1,050 1,138 1,229 1,326 1,427
Profit after tax 1,950 2,113 2,283 2,462 2,651 1,950 2,113 2,283 2,462 2,651
Operating cash flow 3,950 4,113 4,283 4,462 4,651 3,950 4,113 4,283 4,462 4,651
Working Capital
Working capital 1,500 4,075 4,279 4,493 4,717 3,039 0 1,500 4,075 4,279 4,493 4,717 3,039 0
Change in working capital 1,500 2,575 204 214 225 -1,679 -3,039 1,500 2,575 204 214 225 -1,679 -3,039
Cash flow from investment in working capital -1,500 -2,575 -204 -214 -225 1,679 3,039 -1,500 -2,575 -204 -214 -225 1,679 3,039
Initial Investment in Fixed assets -14000 -7500
Sale of fixed assets 1300 1300
Total Project cash flow -15,500 1,375 3,909 4,069 4,237 6,330 4,339 -9,000 1,375 3,909 4,069 4,237 6,330 4,339
Discounting factor @ 6.67% 1 0.9374707 0.878851 0.823897 0.77238 0.724083 0.678807 1 0.937471 0.878851 0.823897 0.77238 0.724083 0.678807
Present value of cashflow -15,500 1,289 3,435 3,353 3,272 4,583 2,945 -9,000 1,289 3,435 3,353 3,272 4,583 2,945
NPV 3,378 9,878
Sensitivity Analysis of Sales Pessimistic Optimistic
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Revenue 12,750 13,388 14,057 14,759 15,498 18,000 18,900 19,846 20,837 21,880
Less: Variable expenses 5,100 5,355 5,623 5,904 6,199 7,200 7,560 7,938 8,335 8,752
Less: Fixed Expenses 4,000 4,200 4,410 4,631 4,862 4,000 4,200 4,410 4,631 4,862
Less: Depreciation 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Pre tax Profit 1,650 1,833 2,024 2,225 2,437 4,800 5,140 5,497 5,871 6,266
Tax 578 641 709 779 853 1,680 1,799 1,924 2,055 2,193
Profit after tax 1,073 1,191 1,316 1,446 1,584 3,120 3,341 3,573 3,816 4,073
Operating cash flow 3,073 3,191 3,316 3,446 3,584 5,120 5,341 5,573 5,816 6,073
Working Capital
Working capital 1,365 3,563 3,741 3,928 4,124 2,588 0 1,680 4,770 5,009 5,259 5,522 3,654 0
Change in working capital 1,365 2,198 178 187 196 -1,536 -2,588 1,680 3,090 239 251 263 -1,868 -3,039
Cash flow from investment in working capital -1,365 -2,198 -178 -187 -196 1,536 2,588 -1,680 -2,575 -204 -214 -225 1,679 3,039
Initial Investment in Fixed assets -10000 -10000
Sale of fixed assets 1300 1300
Total Project cash flow -11,365 875 3,013 3,129 3,250 5,120 3,888 -11,680 2,545 5,137 5,359 5,591 7,752 4,339
Discounting factor @ 6.67% 1 0.9374707 0.878851 0.823897 0.77238 0.724083 0.678807 1 0.937471 0.878851 0.823897 0.77238 0.724083 0.678807
Present value of cashflow -11,365 820 2,648 2,578 2,510 3,707 2,639 -11,680 2,386 4,515 4,415 4,319 5,613 2,945
NPV 3,538 12,513
Sensitivity Analysis of Variable costs Pessimistic Optimistic
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Revenue 15,000 15,750 16,538 17,364 18,233 15,000 15,750 16,538 17,364 18,233
Less: Variable expenses 7,500 7,875 8,269 8,682 9,117 4,800 5,040 5,292 5,556 5,835
Less: Fixed Expenses 4,000 4,200 4,410 4,631 4,862 4,000 4,200 4,410 4,631 4,862
Less: Depreciation 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Pre tax Profit 1,500 1,675 1,859 2,051 2,255 4,200 4,510 4,836 5,177 5,536
Tax 525 586 651 718 789 1,470 1,579 1,693 1,812 1,938
Profit after tax 975 1,089 1,208 1,333 1,465 2,730 2,932 3,143 3,365 3,599
Operating cash flow 2,975 3,089 3,208 3,333 3,465 4,730 4,932 5,143 5,365 5,599
Working Capital
Working capital 1,725 4,316 4,532 4,759 4,997 3,045 0 1,320 3,891 4,086 4,290 4,504 3,045 0
Change in working capital 1,725 2,591 216 227 238 -1,952 -3,045 1,320 2,571 195 204 214 -1,459 -3,039
Cash flow from investment in working capital -1,725 -2,591 -216 -227 -238 1,952 3,045 -1,320 -2,575 -204 -214 -225 1,679 3,039
Initial Investment in Fixed assets -10000 -10000
Sale of fixed assets 1300 1300
Total Project cash flow -11,725 384 2,873 2,982 3,095 5,417 4,345 -11,320 2,155 4,728 4,929 5,140 7,278 4,339
Discounting factor @ 6.67% 1 0.9374707 0.878851 0.823897 0.77238 0.724083 0.678807 1 0.937471 0.878851 0.823897 0.77238 0.724083 0.678807
Present value of cashflow -11,725 360 2,525 2,457 2,391 3,922 2,949 -11,320 2,020 4,155 4,061 3,970 5,270 2,945
NPV 2,879 11,101
Sensitivity Analysis of Fixed cost Pessimistic Optimistic
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Revenue 15,000 15,750 16,538 17,364 18,233 15,000 15,750 16,538 17,364 18,233
Less: Variable expenses 6,000 6,300 6,615 6,946 7,293 6,000 6,300 6,615 6,946 7,293
Less: Fixed Expenses 5,600 5,880 6,174 6,483 6,807 3,200 3,360 3,528 3,705 3,890
Less: Depreciation 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Pre tax Profit 1,400 1,570 1,749 1,935 2,133 3,800 4,090 4,395 4,714 5,050
Tax 490 550 612 677 747 1,330 1,432 1,538 1,650 1,768
Profit after tax 910 1,021 1,137 1,258 1,386 2,470 2,659 2,857 3,064 3,283
Operating cash flow 2,910 3,021 3,137 3,258 3,386 4,470 4,659 4,857 5,064 5,283
Working Capital
Working capital 1,740 4,332 4,549 4,776 5,015 3,045 0 1,380 3,954 4,152 4,359 4,577 3,045 0
Change in working capital 1,740 2,592 217 228 239 -1,970 -3,045 1,380 2,574 198 208 218 -1,532 -3,045
Cash flow from investment in working capital -1,740 -2,592 -217 -228 -239 1,970 3,045 -1,380 -2,574 -198 -208 -218 1,532 3,045
Initial Investment in Fixed assets -10000 -10000
Sale of fixed assets 1300 1300
Total Project cash flow -11,740 318 2,804 2,909 3,019 5,356 4,345 -11,380 1,896 4,461 4,649 4,846 6,815 4,345
Discounting factor @ 6.67% 1 0.9374707 0.878851 0.823897 0.77238 0.724083 0.678807 1 0.937471 0.878851 0.823897 0.77238 0.724083 0.678807
Present value of cashflow -11,740 298 2,464 2,397 2,332 3,878 2,949 -11,380 1,777 3,920 3,830 3,743 4,935 2,949
NPV 2,579 9,775
Sensitivity Analysis of Working capital Pessimistic Optimistic
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Revenue 15,000 15,750 16,538 17,364 18,233 15,000 15,750 16,538 17,364 18,233
Less: Variable expenses 6,000 6,300 6,615 6,946 7,293 6,000 6,300 6,615 6,946 7,293
Less: Fixed Expenses 4,000 4,200 4,410 4,631 4,862 4,000 4,200 4,410 4,631 4,862
Less: Depreciation 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Pre tax Profit 3,000 3,250 3,513 3,787 4,078 3,000 3,250 3,513 3,787 4,078
Tax 1,050 1,138 1,229 1,326 1,427 1,050 1,138 1,229 1,326 1,427
Profit after tax 1,950 2,113 2,283 2,462 2,651 1,950 2,113 2,283 2,462 2,651
Operating cash flow 3,950 4,113 4,283 4,462 4,651 3,950 4,113 4,283 4,462 4,651
Working Capital
Working capital 2,175 3,734 296 310 326 -2,435 0 1,125 1,931 153 161 169 -1,259 0
Change in working capital 2,175 1,559 -3,438 15 16 -2,761 2,435 1,125 806 -1,778 8 8 -1,428 1,259
Cash flow from investment in working capital -2,175 -1,559 3,438 -15 -16 2,761 -2,435 -1,125 -806 1,778 -8 -8 1,428 -1,259
Initial Investment in Fixed assets -10000 -10000
Sale of fixed assets 1300 1300
Total Project cash flow -12,175 2,391 7,550 4,269 4,446 7,411 -1,135 -11,125 3,144 5,891 4,276 4,454 6,079 41
Discounting factor @ 6.67% 1 0.9374707 0.878851 0.823897 0.77238 0.724083 0.678807 1 0.937471 0.878851 0.823897 0.77238 0.724083 0.678807
Present value of cashflow -12,175 2,242 6,636 3,517 3,434 5,366 -770 -11,125 2,947 5,177 3,523 3,440 4,401 28
NPV 8,250 8,391
Sensitivity Analysis Pessimistic Optimistic
NPV Change in Initial Investment 3378 9878
NPV Change in revenue 3538 12513
NPV Change in Variable cost 2879 11101
NPV Change in Fixed cost 2579 9775
NPV Change in working capital 8250 8391

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