Please use Excel and upload the excel file and copy the link so I can download i
ID: 2766281 • Letter: P
Question
Please use Excel and upload the excel file and copy the link so I can download it
An investment of $1.5 million is made at time zero with annual revenues of $600,000 in year 1, growing at a rate of 15% annually over a seven-year horizon. Annual operating and maintenance costs are estimated at $150,000 per year increasing every year by $10,000 thereafter. The salvage value of the investment is $1 million at the end of year 7. There is uncertainty about the estimates of the revenues and the salvage therefore you are asked to perform a two-parameter sensitivity analysis (before tax) to determine the range of feasibility of the variation of those parameters. The company uses a MARRof 15%.Explanation / Answer
Determine the range of feasibility of the variation of those parameters:
Year
Cash flows
Discounting
factor @15%
Discounted
cash flows
0
$ (1,500,000)
1
$ (1,500,000)
1
$ 450,000
0.86956
$ 391,302
2
$ 530,000
0.75614
$ 400,754
3
$ 623,500
0.65752
$ 409,964
4
$ 732,525
0.57175
$ 418,821
5
$ 859,404
0.49718
$ 427,278
6
$ 1,006,814
0.43233
$ 435,276
7
$ 2,177,836
0.37594
$ 818,736
NPV
$ 1,802,131
Year
Cash flows
Discounting
factor @15%
Discounted
cash flows
0
$ (1,500,000)
1
$ (1,500,000)
1
$ 450,000
0.86956
$ 391,302
2
$ 530,000
0.75614
$ 400,754
3
$ 623,500
0.65752
$ 409,964
4
$ 732,525
0.57175
$ 418,821
5
$ 859,404
0.49718
$ 427,278
6
$ 1,006,814
0.43233
$ 435,276
7
$ 2,177,836
0.37594
$ 818,736
NPV
$ 1,802,131