Blooper’s analysts have come up with the following revised estimates for its magnoosium mine:
|
Range |
||||||||||||
| Pessimistic | Optimistic | |||||||||||
| Initial investment | + | 30 | % | – | 25 | % | ||||||
| Revenues | – | 25 | % | + | 20 | % | ||||||
| Variable costs | + | 25 | % | – | 15 | % | ||||||
| Fixed cost | + | 50 | % | – | 50 | % | ||||||
| Working capital | + | 30 | % | – | 4535 | % | ||||||
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 |
| 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 | 1,500 | 4,075 | 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 |
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