Blooper’s analysts have come up with the following revised estimates for its mag
ID: 2788549 • Letter: B
Question
Blooper’s analysts have come up with the following revised estimates for its magnoosium mine: Range Pessimistic Optimistic Initial investment + 25 % – 15 % Revenues – 20 % + 25 % Variable costs + 15 % – 20 % Fixed cost + 40 % – 45 % Working capital + 50 % – 20 % 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 1500 4075 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
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.))
project NPV
PESSIMISTIC EXPECTED OPTIMISTIC
INITIAL INVESTMENT
REVENUES
VARIABLE COST
FIXED COST
WORKING CAPITAL
Explanation / Answer
Sensitivity Analysis :Sensitivity analysis is an analysis that finds out how sensitive an output is to any change in an input while keeping other inputs constant.
Firms use the expected cash flows from each project to calculate its NPV and green light projects with NPV > 0.
Sensitivity analysis asks how the NPV of a project changes when actual cash flows are higher or lower than expected cash flows. One way to incorporate uncertainty into the capital budgeting process is to compare the NPV of a project under two (or more scenarios)
•Good versus Bad
•Pessimistic versus Optimistic
When the project’s NPV is positive under all scenarios, the firm should definitely undertake the project; when the project’s NPV is negative under some scenarios, the firm needs to weigh the positive outcomes against the negative outcomes. When making these decisions, leverage matters.
NPV of Each part:-
In that case NPV is positive.
table will sent very soon with data
Range Pessimistic Optimistic Intial investment -25% -15% Revenue -20% +25% Variable cost +15% -20% Fixed Cost +40% -45% Working capital +50% -20%