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

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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