Professional Documents
Culture Documents
Finance, 2/e
EBITDA = Revenue – Op Ex
where Op Ex = VC + FC
FC+D & A
EBITBreak - Even = .
Price-Unit VC
Break-Even Analysis
o ACCOUNTING Break-Even
• In addition to the accounting operating profit
Break-even points, we can also calculate the
crossover level of unit sales for EBIT.
(FC D & A)Alt.1 (FC D & A)Alt.2
COEBIT (12.7)
Unit contribution Alt.1 Unit contribution Alt.1
Break-Even Analysis
o ACCOUNTING BREAK-EVEN EXAMPLE
• Calculate the accounting operating profit Break-
even point and the crossover level of unit sales
for the automated and manual production
alternatives in Exhibits 12.1 and 12.2.
Risk Analysis
o Financial analysts must often resort to
different types of risk analysis to obtain a
better understanding of how errors in
forecasting these factors affect the
attractiveness of a project.
Risk Analysis
o SENSITIVITY ANALYSIS
• Involves examination of the sensitivity of the
results from a financial analysis to changes in
individual assumptions
• An analyst might examine how a project’s NPV
changes if there is a decrease in the value of
individual cash inflow assumptions or an
increase in the value of individual cash outflow
assumptions.
Using Excel – Sensitivity Analysis
Exhibit 12.8: Incremental Free Cash
Flows and NPV
Risk Analysis
o SCENARIO ANALYSIS
• An analytical method concerned with how the
results from a financial analysis will change
under alternative scenarios
• An analyst who wants to examine how the
results from a financial analysis will change
under alternative scenarios performs a scenario
analysis.
Exhibit 12.9: NPV Values for
Automated Hammock Production
Risk Analysis
o SIMULATION ANALYSIS
• An analytical method that uses a computer to
quickly examine a large number of scenarios
and obtain probability estimates for various
values in a financial analysis
• Rather than selecting individual values for each
of the assumptions–such as unit sales, unit
price, and unit variable costs–the analyst
assumes that those assumptions can be
represented by statistical distributions.
Risk Analysis
o SIMULATION ANALYSIS
• A computer program repeatedly draws numbers
for the distributions for various assumptions,
plugs them into the cash flow model, and
computes the annual cash flows and NPV.
• In addition to providing an estimate of the
expected cash flows, it also provides
information on the distribution of the cash
flows that the project is likely to produce in each
year.
Investment Decisions With Capital
Rationing
o SELECTING THE BEST PROJECTS
• What does a firm do when it does not have
enough money to invest in all available positive-
NPV projects?
• The process of identifying the bundle of
projects that creates the greatest total value and
allocating the available capital to these projects
is known as capital rationing.
Exhibit 12.10: Positive NPV
Investments for a Single Year
Investment Decisions With Capital Rationing