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CASE45M

Student Version

05/10/13

CRANFIELD INC. (Part II)
Risk Analysis in Capital Budgeting Decisions

This case focuses on capital budgeting risk assessment using the lite
cranberry juice project that was introduced in Case 12A, Cranfield
Inc. (Part I).
The model develops incremental cash flow estimates, then calculates
NPV, IRR, MIRR, and Payback for the lite orange juice project. This
model differs from the Case 12A model only in that this one includes
three data tables which can greatly facilitate sensitivity analysis.
Also, this model contains a graph which can be used to plot the
sensitivity diagrams. You can change the data tables, then use them to
change the graph.
If you are using the student version of the model, some of the cells
have been blanked out. Before using the model, it is necessary to
fill in the empty cells with the appropriate formulas. Once this
is done, the model is ready for use.
The following cells have been deleted:
C57, E58, F58.F59, E60, E69, F74, F79.F80, F85, G93, C97, F99
D111, D113, B138, B146
======== ================= =============== =========== ========= ========== =========
INPUT DATA:

KEY OUTPUT:

Initial Investment:

Equipment cost
Freight
Installation
Change in NWC

$400,000
$20,000
$40,000
$15,000

NPV
IRR
MIRR
Payback

$195,063
1.0%
19.9%
2.3

Operating Flows and Inflation Rates:

Unit sales
t=0 sales price
Fixed oper costs
t=0 VC per unit
Price inflation
Cost inflation

400,000
$2.00
$100,000
$1.25
5.0%
2.0%

SV, Taxes, and C of C:

Salvage value
Tax rate
Cost of capital

$50,000
40%
10%

Cannibalization of Other Projects:

Revenue Loss
Cost Reduction
Net Cannibalization

$40,000
$20,000

$20,000

00 Revenues Fixed operating costs Variable operating costs Total operating costs Depreciation Net cannibalization effects Before tax income Taxes Net income Plus depreciation Net operating cash flow Year -----1 2 3 4 MACRS Dep.000 32.000 --------------$192.000) ======== $460.593 ======== ======== .920 $20.604 69.800 207.000 -------$192.000 530.898 $244.920 --------------$34.000 -------$45.000 --------------$186.100 100.593 -------$50.43 400.000 -------$926.000 20.000 400.200 45% 207.000 15. (PART II) Net Investment Outlay: Equipment cost Freight Installation Change in NWC Cash Flows: Unit price Unit sales Depreciation Schedule: Basis: $400.000 ======== Year 0 -------$2.32 400.000 101.880 151.280 13.200 -------$199.000 -------$206.405 100.393 32.200 $34.000 20.720 $227.000 100.604 630.880 -------- Salvage value SV tax Recovery of NWC Termination CF Project NCF -------($475.000 20.000 510. End of Year Factor Expense Book Value -------------------33% $151.496 82.200 20.000 --------------$58.598 -------$123.596 -------$167.000 620.000 541.000 -------$972.000 -------$278.200 0 ------------100% $460.898 -------- Year 4 -------$2.800 $308.000 $882.800 23.000 --------------$840.216 32.000 -------$475.200 7% 32.000 20.000 --------------$186.898 69.000 15.800 207.200 610.720 $227.000 20.989 111.10 $2.000 40.000 ====== ======== Year Year 1 2 --------------$2.200 151.======== ================= =============== =========== ========= ========== ========= |:: MODEL-GENERATED DATA: CRANFIELD INC.216 641.880 ======== ======== Year 3 -------$2.000 100.200 15% 69.21 400.000 520.

502.3 -0.000 195.5% 2.60 1.1 0.2% 19.11 $326.000 266.9% 14.1 1.00 4.31% 17.063 25% $651.41 1.912 IRR: MIRR: 0.517 41.3131195 4.4% 27.000 0 400.38 2.19% 1.87% 1.6% -4.9% 21.1 IRR: MIRR: 0.4% -----11.2 0.9% 2.4055 ($318.31 0.8% 0.924) 50% $195.4% Payback: 2.0% 66.390) (147.063 27.7 23.063.3 2.2% 8.5% Payback: 2.0% 38.78 2.1 280.2 -0.1988042 8.2% 19.942 409.000 360.000 320.00 3.2 -0.01 0.35 3.3% 12.000 520.3 -0.92 1. variation Data Tables for Sensitivity Analysis 1.8% 28.35% 29.091 |:: Scenario Analysis: Scenario -------Worst Base Best Prob.14 Deviation -0.366 708.2% 61.9% 2. Salvage Value .000 480.20 2.3 981.184 123.40 1.2 0.5% 26.4055 ($19.1988042 -26.3131195 3.063 27.1% 19.5% $192.0% 19.6% 44.00 195.60 366.3 440.01 0.9% 2.99 2.85 1. Initial Sales Price Price: NPV: 195063.60 Expected value Standard deviation Coeff.255) 52.040 0 1 2 3 4 ($475.503 337.1% 16.624 Deviation -0.8% 12.31 0.40 2.498 377.382 33.805 IRR MIRR -----22.9% 36.2% 11.0% 54.000) (288.1% 23. Unit Sales: Units: NPV: 195063.3 16. ----- NPV --------25% ($271.2% -16.280) (60.598 1.9% 38.09 1.Decision Measures: Cumulative Cash Flows: NPV IRR MIRR Payback TV $195.215 537.239) 23.400) 132.80 0 2.0% 25.2% 1.1 0.56 1.9% 32.

31 Deviation -0.13 0 1.775 IRR: MIRR: 0.31 2.31 4.922 (6.352 (4.786 241.924 93.1988042 51.000 65.4% 27.000 45.605 226.Salvage Value: NPV: 195063.00 5.307 .01 0.396 Cost Inflation: -------------------------.1% 2.31 2.4055 $494.268) 102.9% 2.063 218.000 0 50.----------------2% 1% 3% 4% $28.2% 19.1 35.1988042 27.2% 27.3 -0.9% 35.8% 19.5% 43.183 68.2 -0.31 2.31 0.01 0.31 Inflation (Data Table 2 with NPV as Output Variable) Price Inflation: 195063.000 40.01 0.76 3.211 27.0% 8.0% 195.2 0.8% Payback: 2.61 1.3131195 1.2 -0.132 258.31 Deviation -0.821 125.4% 2.097 163.50 1.4055 $188.31 2.1 0.629 131.238 211.244 87.333 IRR: MIRR: 0.4055 $242.2% 19.082 201.087 ($18.072) 18.31 2.112 199.1988042 26.6% 9.---------------.9% 2.3% 27. Variable Cost: VC per Unit: NPV: 195063.1 0.3 1.000 195.31 4.31 2.360) (104.063 27.0% 31.6% 27.2 0.2% 20.0% 180.25 195.9% 2.0% 19.845) 64.2% 18.3 11.2% 27.0% 20.888 107.7% 21.123 152.6% 20.361 171.323 147.0% 13.3% 27.000 197.2% 19.965 193.3131195 2.78 1.7% 27.38 1.99 Deviation -0.4% 24.3131195 2.961 41.198 31.487 294.3% 20.236 78.2% 19.404 27.31 0.0% 27.161 201.698 195.171 210.3 55.199 394.1% 9.221 116.063 27.221 281.00 1.5% Payback: 2.------------------.335 166.63 95.939 55.0% 12.3 -0.3 -0.2% 19.9% 19.014 IRR: MIRR: 0.31 0.31 2.2 -0.536 235.1 0.663 17.6% 26.000 60.1% Payback: 2.2 0.008 140.1% 20.498 187.4 0% 1% 2% 3% 4% 5% 6% -------0% $51.1 0.926 155.384 $5.0% 9.0% 0 10.993 178.7% 3.916 190.6% -0.2% 2.1% 15.31 2.654) ($42.1 7. Cost of Capital: WACC: NPV: 195063.063 27.88 1.

164 317.7% 8% 322.009 299.851 252.920 |:: ======== ================= =============== =========== ========= ========== ========= END .423 294.148 276.461 341.322 364.233 269.110 228.

SENSITIVITY ANALYSIS 800000 600000 NPV 400000 200000 0 -200000 -400000 % DEVIATION FROM EXPECTED VALUE Units Price Salvage VC/Unit wacc .