PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 8PS
Scenario analysis What is the
Unit sales are 20% below expectations.
Unit price is 10% below expectations.
Unit variable cost remains at 50% of revenue.
Fixed costs increase by 5%.
Investment in plant and equipment and in working capital are unchanged.
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The most likely outcomes for a particular project are estimated as follows:
Unit price
Variable cost
$
49
21
$309, 000
29, 200 uni ts per year
Fixed cost
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However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10%
higher or 10% lower than the initial estimate. The project will last for 13 years and requires an initial investment of $0.99 million, which
will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 35% and the required rate of return is
17%. What is project NPV in the "best case" scenario, that is, assuming all variables take on the best possible value? (Round your
answer to the nearest whole dollar amount.)
NPV in the "best case" scenario
1961296
What about the "worst case" scenario? (Use the minus sign for negative values. Round your answer to the nearest whole dollar
amount.)
NPV in the "worst case" scenario
-148345
Year
Sales volume (units)
Selling price per unit
Variable cost per unit
Fixed cost
1
15,000
450
260
750,000
2
15,000
475
280
750,000
3
10,000
500
295
750,000
4
10,000
570
320
750,000
Oman company has a nominal cost of capital of 13%.
Required:
Measure the sensitivity of the project to changes in variables and give your recommendations
Analysis of a project: In determining the annual profit of a project the following information is used: Variable costs are S /. 10 per unit, fixed costs vary according to the level of production in the following image:
If the sale price is S /. 24 and sales of 15,000 units are expected, in addition, an annual profit of S /. 140,000. How many additional units must be sold at a price of S /. 20?
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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- Plentiful Products is analyzing a proposed project with expected sales of 6300 units +-5%. The expected variable cost per unit is $8 and the expected fixed costs are $22000. Cost estimates are considered accurate within a range of +-4%. The depreciation expense is $6400. The sale price is estimated at $17 per unit, +-1%. What is the sales revenue under the pessimistic case scenario? Multiple choice $107100 $125685 $94684 $106029 $100728arrow_forwardThe most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: 50 24 30 $370,000 36,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.4 million, which will be depreclated straight-line over the project life to a final value of zero. The firm's tax rate is 21% and the required rate of return is 14%. (For all the requirements, a negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project NPV in the worst-case scenario?arrow_forwardA project has fixed costs of $400 per year, depreciation charges of $400 a year, annual revenue of $3,600, and variable costs equal to two-thirds of revenues. a. If sales increase by 17%, what will be the percentage increase in pretax profits? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is the degree of operating leverage of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
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