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Sensitivity Analysis The initial investment outlay for a capital investment project consists of Rs 100 lakh for Land, plant and machinery and miscellaneous fixed assets and Rs 40 lakh for working capital. Other details are as follows:
Sales(Lakh units per annum for years 1 to 5) Selling price(per unit) Variable cost(per unit) Fixed overhead(excluding depreciation)(lakh per annum for years 1 to 5) Rate of depreciation on plant and machinery(% on wdv) Salvage value of plant and machinery (Equal to the wdv at the end of year 5) Applicable tax rate Time horizon(years) Cost of capital
1 120 60 15 25
40 5 12
Required: 1. Indicate the financial viability of the project by calculating the net present value. 2. Determine the sensitivity of the project’s NPV under each of the following conditions: a) Decrease in selling price by 10% b) Increase in variable cost by 10% c) Increase in variable cost by 5% and increase in selling price by 5%
2 .Scenario Analysis ABC Ltd is setting up a new flour mill near Bangalore.Based on ABC’S experience , the project staff of ABC has developed the figures as follows: Year 0 Year 1-10 Investment -20 Sales 18 Variable costs(66% of sales) 12 Fixed Costs 1 Depreciation 2 Pre Tax Profit 3 Taxes 1 Profit after taxes 2 Cash flow from operation 4 Net cash flow -20 4 Calculate the NPV for the flour mill project assuming cost of capital as 12%
Financial Break even Analysis Calculate the financial break even level of sales for the flour mill project based on details given in the table in sum 1.3 1 Optimistic 18 21 65 .5%. Discounting Rate Calculate the cost of equity using CAPM approach for the following : From the information provided to the firm by its investment advisors along with the firm’s own analysis. .5 and the return on the market portfolio equals 12. the firm’s beta equals 1. 4.8 3.Calculate the NPVs for the pessimistic.66 1. expected and optimistic forecasts as indicated in the following table: Key Variable Investment Sales Variable costs as a % of sales Fixed costs RANGE (rs in million) Pessimistic Expected 24 20 15 18 70 66. it is found that the risk free rate of return equals 10%.