finc6001

Exercise 1
Finc 6001

ID Number: 420057462
Name: Ying Liu
Email: [e-mail]
Lecture time: Tuesday 6pm-9pm

Exercise 1
a. Will the project be undertaken? Pessimistic
Expected
Optimistic
Market size
110,000
120,000
130,000
Market share
22%
25%
27%
Price
$115
$120
$125
Variable costs
$72
$70
$68
Fixed costs
$850,000
$800,000
$750,000
Investment
$1,500,000
$1,500,000
$1,500,000
Table 1
From the above information, we can know the expected cash flow, with starting a new racket, bring to us. First of all, we need to know the expected sales and expected variable costs, which are not indicated directly.
Expected sales = market size × market share × price
Therefore the expected sales = market size × market share × variable costs
So, the expected variable costs = 120,000×25%×$120 = $3,600,000
Expected variables costs = 120,000×25%×$70 = $2,100,000
Therefore, the net cash flow of this project will be given as the flowing: expected cash flow Year 0
Year 1-5 investment 1,500,000 sales 3,600,000 variable costs 2,100,000 fixed costs 800,000 depreciation 300,000 profit before tax 400,000 tax 40% 160,000 profit after tax 240,000 operating cash flow 540,000
Net cash flow
-1,500,000
540,000
Table 2
NPV= -$1,500,000+ $540,000*[(1-1.13^-5)/0.13] = $399,304.88

1. For optimistic sensitivity analysis
Based on the information given as the table 1, we can see clearly that there are five variables in the analysis, in terms of market size, market share, price, variable costs, and fixed costs. For each variable changing, we can get different cash flows, which will result in the movement of NPV even making the negative NPV. The consequences of the altering are given in the following area.
When the market size changes from 120,000 to 130,000, the cash flow and NPV will be as the flowing:
Optimistic cash flow-market