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An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called

A.IRR analysis.

B.scenario analysis.

C.accounting break-even analysis.

D.sensitivity analysis.

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Related questions

Select the assumptions underlying CVP analysis. Choose the four assumptions underlying CVP analysis

1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units sold.

2. Total costs can be separated into a fixed component that does not vary with the units sold and a component that is variable with respect to the units sold.

3. Fixed costs only include the direct fixed costs and do not include indirect fixed costs of a product (or service).

4. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in relation to units sold within a relevant range and time period.

5. The number of units sold is one of many cost drivers.

6. The selling price, variable cost per unit, and fixed costs are known and constant.

Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms, in which payment is expected by 30 days from the invoice date. Concerned about deteriorating collection patterns, the credit manager has divided customers into two groups for examination purposes: Prompt payors and laggards. Prompt payors (80 percent of Mississippi Delta’s customers) pay, on average, in 35 days, versus a 72-day average for the laggards. The manager wonders if the credit terms should be modified to include a 2 percent cash discount on invoices paid within 10 days. The average invoice is the same for both groups, roughly $4,000. The manager expects 50% of the prompt payors to pay in exactly 10 days and the average on the other half to slip to 40 days. He thinks that 20% of the laggards will pay in 10 days and the average on the others will slip to 80 days. Given these forecasts, he is not sure that the lost revenue from discount takes (who would then pay only 98% of the invoiced dollar amount) justifies the improved collection. The company’s annual cost of capital is 11%.

A.) Using NPV calculations, show the PV of the present collection experience.

B.) Calculate the NPV of the proposed 2/10, net-30 terms.

C.) Based on your NPV analysis, should Mississipi Delta Inc. adopt the cash discount?

D.) What other factors should be taken into account before Mississippi Delta Inc. makes a switch, assuming such is justifiable on an NPV basis?

E.) Sensivity analysis involves varying the key assumptions, one at a time, and observing the effect on the key decision criterion-such as profits or NPV. In the NPV analysis above, how could could one carry out sensitivity analysis? (If you have a financial spreadsheet available, conduct a sensitivity analysis that varies the number of prompt payors who will pay in exactly 10 days and report your findings.) *** Answer in an Excel document and give explanation as to how and why you got to your answer

Trying to understand how to find the following below using a scenario, sensativity, and break-even analysis in Excel:

Project Parameters:

Suppose, we can sell 50,000 cans of shark attractant per year at a price of $4.00 per can. It costs us about $2.50 per can to make the attractant. A new product such as this one typically has only a three-year life. We require a 20% return on new products.

Fixed costs for the project will run $12,000 per year.

We will need to invest a total of $90,000 in manufacturing equipment. For simplicity, we will assume that this $90,000 will be fully depreciated over the three year life of the project.

The project will require an initial $20,000 investment in net working capital.

The tax rate is 34%.

Questions:

1. Set-up the problem below in the space provided. Calculate the NPV. Calculate the IRR.

2. Do a Scenario Analysis with the three following scenarios:

a. Best Case - Price per can $6, Cost per can $1.50

b. Base Case - Price per can $4, Cost per can $2.50

c. Worst Case - Price per can $4, Cost per can $3.50

3. Do a Sensitivity Analysis where you vary the number of cans from 20,000 to 80,000.

4. Do the following break-even analyses using the base case:

a. Break-even price so that NPV = 0

b. Break-even quantity so the NPV = 0

c. Break-even cost per can so that NPV = 0

Scenario:

Number of cans 50000
Price per can 4
Cost per can 2.5
Fixed Cost 12000
Tax rate 34%
Discount rate 20%
Initial Investment 90000
0 1 2 3
Revenue $ 200,000
COGS $ 125,000
Gross Profit $ 75,000
Fixed Cost $ 12,000
EBITDA $ 63,000
Depreciation
EBIT
Tax
Net Income
NCS $ (90,000)
ΔNWC $ (20,000) $ 20,000
CFFA
NPV Hint: It should be $10,648 for the Base Case.
IRR

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