Question

Question:

Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for church services.

You estimate that you will need an initial $4,200,000 in terms of investment to get the project started.

The project will last for 5 years. The project will bring in annual cash flows of $1,375,000. It also estimates a salvage value of $300,000 after dismantling costs.

Your cost of capital is 13 percent. Assume no taxes or depreciation.

Required:

a) What is the NPV of the sanitizer project? Should you pursue this project?

b) Suppose you believe that there is a best case scenario where initial investment could be 15% lower with salvage value and revenue being 10% higher, what would be the NPV under this scenario?

c) In the worst case scenario, you expect annual cash inflows to be 10% lower, salvage value to be 12% lower and initial investment to be 10% higher. Calculate the NPV under this worst case scenario. Would you still pursue the project?

d) You just received additional information that suggests that your base case (answer to a), best case (b) and worst case (c) scenarios have probabilities of 0.35, 0.35 and 0.30 respectively. What will be the expected NPV of the sanitizer project. What about the standard deviation of the sanitizer project? Do you think the project is still viable?

Answer 1

	Answer
a	Initial Investment	$                              4,200,000.00
	Period	5 Years
	Annual Cash flows	$                              1,375,000.00
	Salvage Value	$                                 300,000.00
	Cost of Capital	13%
	NPV
	Present Value of Cash Inflows	PVAF(13%,5Yrs)*1375000+PVF(13%,5Th Yr)*300000
	PVAF(13%,5 Years)	1-(1+r)^-n/r
		(1-(1.13)^-5)/0.13
		3.5172
	PVF(13%,5th Year)	1/(1+r)^n
		1/(1.13)^5
		0.5428
	Present Value of Cash Inflows	(1375000*3.5172)+(300000*0.5428)
		$                              4,999,020.97
	NPV	4999020.97-4200000
		$                                 799,020.97
	shall persue project since NPV is positive
b	Initial Investment	$                              3,570,000.00
	Period	5 Years
	Annual Cash flows	$                              1,512,500.00
	Salvage Value	$                                 300,000.00
	Cost of Capital	13%
	NPV
	Present Value of Cash Inflows	PVAF(13%,5Yrs)*1512500+PVF(13%,5Th Yr)*300000
	PVAF(13%,5 Years)	1-(1+r)^-n/r
		(1-(1.13)^-5)/0.13
		3.5172
	PVF(13%,5th Year)	1/(1+r)^n
		1/(1.13)^5
		0.5428
	Present Value of Cash Inflows	(1512500*3.5172)+(300000*0.5428)
		$                              5,482,640.26
	NPV	5482640.26-3570000
		$                             1,912,640.26
C	Worst Case
	Initial Investment	$                              4,620,000.00
	Period	5 Years
	Annual Cash flows	$                              1,237,500.00
	Salvage Value	$                                 264,000.00
	Cost of Capital	13%
	NPV
	Present Value of Cash Inflows	PVAF(13%,5Yrs)*1237500+PVF(13%,5Th Yr)*264000
	PVAF(13%,5 Years)	1-(1+r)^-n/r
		(1-(1.13)^-5)/0.13
		3.5172
	PVF(13%,5th Year)	1/(1+r)^n
		1/(1.13)^5
		0.5428
	Present Value of Cash Inflows	(1237500*3.5172)+(264000*0.5428)
		$                              4,495,862.31
	NPV	4495862.31-4620000
		$                               (124,137.69)
	shall not persue project since NPV is Negative
D	Standard Deviation of Project
	Scenario	Cash Flows	Probablitiy	Expected Net cash flows
	Best case A	$                              4,999,020.97	0.35	$                     1,749,657.34
	Best case B	$                              5,482,640.26	0.35	$                     1,918,924.09
	Worst Case C	$                              4,495,862.31	0.3	$                     1,348,758.69
				$                    5,017,340.12
	Scenario	Cash Flows-Exp.Net cash flows	Variance	Variance*Probabilitiy
	A	B	C= B^2	D= C*Probability
	Best case A	$                              3,249,363.63	$ 10,558,363,983,873.90	$     3,695,427,394,355.85
	Best case B	$                              3,563,716.17	$ 12,700,072,951,182.10	$     4,445,025,532,913.74
	Worst Case C	$                              3,147,103.62	$    9,904,261,172,887.08	$     2,971,278,351,866.12
				$ 11,111,731,279,135.70
	Standard Deviation	Square root of D	jeff jeffy Next > < Previous Related Solutions Question: Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for... Question: Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for church services. You estimate that you will need an initial Gh¢4,200,000 in terms of investment to get the project started. The project will last for 5 years. The project will bring in annual cash flows of Gh¢1,375,000. It also estimates a salvage value of Gh¢300,000 after dismantling costs. Your cost of capital is 13 percent. Assume no taxes or depreciation. Required: (a) What is... Question: Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for... Question: Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for church services. 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