PPT_Capital budgeting under uncertainity

Intital investment
Cash inflow till perpetuity
Cost of capital

NPV of the project

PV of cash outflow
PV of cash inflow
(Applying perpetuity formula)

NPV
Case 1 If initial investment increase by 1
New initial investment
PV of cash outflow
PV of cash inflow
New NPV
Change in NPV
 Note: We are considering change in unfavoura
500
200
10%

PV of cash inflow-PV of cash outflow

-500
2000

1500
10% Case 2
550 initial investment
550 Inflow decreases by
2000 New inflow (till perpetuity)
1450 PV of cash outflow
0.0333333333 PV of cash inflow
3.33 New NPV
Change in NPV
ng change in unfavourable direction ie increase in initial investment, decrease in ca

If cash inflow decreases by 10%

500
10%
180
500
1800
1300
0.1333333333
13.33
n ie increase in initial investment, decrease in cash inflows, increase in discount rat

Case 3 If cost of capital increases by 10%

initial investment 500
Inflow (till perpetuity) 200
Discount rate increases by 10%
New discount rate 0.11
PV of cash outflow
New PV of cash inflow 1818
New NPV 1318
Change in NPV 0.1212121212
12.121
ease in discount rate

ses by 10%
Cash flow forecast for Surya electronics Corporations's Jet Engine
Year 1
Revenues
Variable costs
Fixed costs
Depreciation
Pretax profit
Tax (t=0.34)
Net profit
Cash flow
Initial investment cost 1500
Cash inflow
PV of cash flows
NPV

Estimates for Surya Electronics Solar plane engine

Variable Pessimistic Expected or Best

Market size (per year) 5000 10000

Market share 20% 30%
Price (in millions) (per plane) 1.9 2
Variable cost (per plane) (in mil 1.2 1
Fixed cost (per year) 1891 1791
Investment 1900 1500

NPV calculatios (in millions for the solar plane engine using sensitivity analysis

Lets change one variable at a time

Year 1
Revenues
Variable costs
Fixed costs
Depreciation
Pretax profit
Tax (t=0.34)
Net profit
Cash flow
Initial investment cost 1500
PV of cash flows
NPV

Variable Pessimistic Expected or Best

Market size (per year) -1802 1517

Market share -696 1517
Price (in millions) (per plane) 853 1517
Variable cost (per plane) (in mil 189 1517
Fixed cost (per year) 1295 1517
Investment 1208 1517

The solar plane engine does not exhibit wide dispersion because all but two of the numbers a
 Cost of capita 15%
Year 2-6 No of years 5
6000
3000
1791
300
909
309.06
599.94
899.94

900
₹ 3,016.94
₹ 1,516.94

Optimistic

20000
50%
2.2
0.8
1741
1000

ity analysis

Year 2-6 Market size

6000 Market share
 3000 No of units sold
1791 Price per Unit
300 Variable cost per unit
909
309.06
599.94 Note
900 Change the cell I33, to understand the corresp
Similarly change cell I34, I35, I36 and I37 to ex
₹ 3,016.94
₹ 1,516.94

Optimistic

8154
5942
2844
2844
1628
1903

l but two of the numbers are positive. Managers viweing the table will consider NPV analysis to be use
Pessimistic Expected Optimistic
5000 10000 20000
20% 30% 30%
 1000 3000 6000
1.9 2 2.2
1.2 1 0.8

l I33, to understand the corresponding increase/decrease in NPV (represented in ccell E44) for market
ge cell I34, I35, I36 and I37 to examine the impact of change in market share, No. of units, price per un

l consider NPV analysis to be useful for the solar powered jet engine.
ell E44) for market size
units, price per unit and variable cost on NPV.
 Base case Best case
Unit sales: 4,000 4,000
Price per unit $ 250 $ 250
Variable costs per unit: $ 40 $ 40
Fixed costs per year: $ 2,000 $ 2,000
$ 20,000
Initial cost: $ 20,000
Project life (years): 5
Required return: 15%
Tax rate: 34%

With these values, we need to calculate the base case, best case, and worst case NPVs and IRRs. First, we want to ca

Base Case Income Statement Note:

Sales $ 1,000,000
Variable costs 160,000
Fixed costs 2,000
Depreciation 4,000
EBIT $ 834,000
Taxes (34%) 283,560
Net income $ 550,440

OCF $ 554,440

NPV $ 1,838,569
 Worst case
1000
125
70
2000
45000

Rs. First, we want to calculate the NPV and IRR with the base case projections, which are:

Data->What if analysis->Scenario manager

Scenario Summary
Current Values: best case Worst case
Changing Cells:
Unit_sales 2,000 4,000 1,000
Price $ 150 $ 250 $ 125
Variable_cost_per_unit $ 60 $ 40 $ 70
Fixed_costs $ 2,000 $ 2,000 $ 2,000
Investment $ 40,000 $ 20,000 $ 45,000
Result Cells:
NPV $ 362,929 $ 1,838,569 $ 82,516
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.