a. Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback.

Input Data (in thousands of dollars)
Scenario name Base Case Note: the items in red will be used in a scenario analysis.
Probability of scenario 50%
Equipment cost $25,000
Net operating working capital/Sales 12% Key Results:
First year sales (in units) 2,000 NPV =
Sales price per unit $21.00 IRR =
Variable cost per unit (excl. depr.) $15.00 Payback =
Nonvariable costs (excl. depr.) $1,500
Inflation in prices and costs 2.5%
Estimated salvage value at year 4 $1,000
Depreciation years Year 1 Year 2 Year 3 Year 4
Depreciation rates 20.00% 32.00% 19.20% 11.52%
Tax rate 20%
WACC for average-risk projects 10%

Intermediate Calculations 0 1 2 3 4
Units sold
Sales price per unit (excl. depr.)
Variable costs per unit (excl. depr.)
Nonvariable costs (excl. depr.)
Sales revenue
Required level of net operating working capital
Basis for depreciation
Annual equipment depr. rate 20.00% 32.00% 19.20% 11.52%
Annual depreciation expense
Ending Bk Val: Cost – Accum Dep’rn
Salvage value
Profit (or loss) on salvage
Tax on profit (or loss)
Net cash flow due to salvage
Years
Cash Flow Forecast 0 1 2 3 4
Sales revenue
Variable costs
Nonvariable operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (20%)
Net operating profit after taxes
Add back depreciation
Equipment purchases
Cash flow due to change in NOWC
Net cash flow due to salvage
Net Cash Flow (Time line of cash flows)

Key Results: Appraisal of the Proposed Project

Net Present Value (at 10%) =
IRR =
MIRR =
Payback =
Discounted Payback =
Data for Payback Years Years
0 1 2 3 4
Net cash flow
Cumulative CF
Part of year required for payback

Data for Discounted Payback Years Years
0 1 2 3 4
Net cash flow $0 $0 $0 $0 $0
Discounted cash flow
Cumulative CF
Part of year required for discounted payback

b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables’ values at 10% and 20% above and below their base-case values.

% Deviation 1st YEAR UNIT SALES Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case 1st Year Unit Sales in Cell B79 should be the number 2,000 and NOT have the formula =D10 in that cell. This is because you’ll use D10 as the column input cell in the data table and if Excel tries to iteratively replace Cell D10 with the formula =D10 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won’t tell you that there is a problem, so you’ll just get the wrong values for the data table!
from Base NPV
Base Case 2,000 $0
-20%
-10%
0%
10%
20%

% Deviation SALES PRICE % Deviation VARIABLE COST
from Base NPV from Base NPV
Base Case $21.00 $0 Base Case $15.00 $0
-20% -20%
-10% -10%
0% 0%
10% 10%
20% 20%

Deviation   NPV at Different Deviations from Base                                                                                       
from        Sales   Variable                                                                                
Base Case   Units Sold  Price   Cost/Unit                                                                               
-20%    $0 $0 $0                                                                             
-10%    $0 $0 $0                                                                             
0%  $0 $0 $0                                                                             
10% $0 $0 $0                                                                             
20% $0 $0 $0                                                                             

Range   $0     $0     $0                                                                                 

c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Hint: Use Scenario Manager. Go to the Data menu, choose What-If-Analyis, the choose Scenario Manager. After you create the Scenario’s, you can pick a scenario and type in the resulting NPV (but be sure to return the Scenario to the base-case afterward). Or you can create a Scenario Summary and use a cell reference to the Scenario Summary worksheet to show the NPV for each scenario.)

        Unit Sales  Sales Price per Unit    Variable Costs per Unit                                                                         

Scenario Probability NPV

Best Case 25% 2,400 $24.00 $12.00
Base Case 50% 2,000 $20.00 $15.00
Worst Case 25% 1,600 $16.00 $18.00

                Expected NPV =                                                                          
                Standard Deviation  =                                                                           
                Coefficient of Variation = Std Dev / Expected NPV =                                                                         

d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback.

CV range of firm’s average-risk project: 0.8 to 1.2
Low-risk WACC = 8%
WACC = 10%
High-risk WACC = 13%

Risk-adjusted WACC =
Risk adjusted NPV =
IRR =
Payback =

e. On the basis of information in the problem, would you recommend that the project be accepted?