PROJECT NPV

Basics

(in thousands of $)
Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Key Assumptions
Unit Sales
Inflation Rate
Real Cost of Capital
Tax Rate

2000
2.0%
11.0%
35.0%

4000
2.5%
11.2%
35.0%

5600
3.0%
11.4%
35.0%

6800
3.5%
11.6%
35.0%

7400
4.0%
11.8%
35.0%

3700
4.0%
12.0%
35.0%

1800
4.0%
12.2%
35.0%

Discounting
Discount Rate = Cost of Capital
Cumulative Discount Factor

0.0%

Price or Cost / Unit

Sales Revenue / Unit
Variable Cost / Unit
Cash Fixed Costs

$9.70
$7.40
$5,280

Cash Flow Forecasts

Sales Revenue
Variable Costs
Gross Margin
Cash Fixed Costs
Depreciation
Total Fixed Costs
Operating Profit
Taxes
Net Profit
Add Back Depreciation
Operating Cash Flow
Investment in Plant & Equip
Cash Flows
Present Value of Each Cash Flow
Net Present Value

($11,350)

$1,400

PROJECT NPV

Sensitivity Analysis

(in thousands of $)
Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Key Assumptions
Base Case Unit Sales
Unit Sales Scale Factor
Unit Sales
Inflation Rate
Real Cost of Capital Increment
Real Cost of Capital
Tax Rate

2000
100.0%
2000
2.0%

4000

5600

6800

7400

3700

1800

11.0%
35.0%

4000
2.5%
0.2%
11.2%
35.0%

5600
3.0%
0.4%
11.4%
35.0%

6800
3.5%
0.6%
11.6%
35.0%

7400
4.0%
0.8%
11.8%
35.0%

3700
4.0%
1.0%
12.0%
35.0%

1800
4.0%
1.2%
12.2%
35.0%

13.2%
13.2%

14.0%
29.0%

14.7%
48.1%

15.5%
71.0%

16.3%
98.9%

16.5%
131.6%

16.7%
170.3%

Sales Revenue / Unit

$9.70

$9.94

$10.24

$10.60

$11.02

$11.46

$11.92

Variable Costs / Unit:

Direct Labor
Materials
Selling Expenses
Other
Total Variable Cost / Unit

$3.50
$2.00
$1.20
$0.70
$7.40

$3.59
$2.05
$1.23
$0.72
$7.59

$3.70
$2.11
$1.27
$0.74
$7.81

$3.82
$2.19
$1.31
$0.76
$8.09

$3.98
$2.27
$1.36
$0.80
$8.41

$4.14
$2.36
$1.42
$0.83
$8.75

$4.30
$2.46
$1.47
$0.86
$9.10

$2,800
$580
$450
$930
$520
$5,280

$2,870
$595
$461
$953
$533
$5,412

$2,956
$612
$475
$982
$549
$5,574

$3,060
$634
$492
$1,016
$568
$5,770

$3,182
$659
$511
$1,057
$591
$6,000

$3,309
$685
$532
$1,099
$615
$6,240

$3,442
$713
$553
$1,143
$639
$6,490

$0.89
$3,550

$0.91
$5,094

$0.94
$6,371

$0.97
$7,176

$1.01
$3,731

$1.05
$1,888

$1.09
$0

$19,400
$14,800
$4,600

$39,770
$30,340
$9,430

$57,348
$43,750
$13,598

$72,075
$54,985
$17,090

$81,571
$62,230
$19,342

$42,417
$32,359
$10,058

$21,461
$16,372
$5,089

$5,280
$1,421
$6,701

$5,412
$1,421
$6,833

$5,574
$1,421
$6,995

$5,770
$1,421
$7,191

$6,000
$1,421
$7,421

$6,240
$1,421
$7,661

$6,490
$1,421
$7,911

($2,101)
($736)
($1,366)

$2,597
$909
$1,688

$6,603
$2,311
$4,292

$9,898
$3,464
$6,434

$11,920
$4,172
$7,748

$2,396
$839
$1,558

($2,823)
($988)
($1,835)

$1,421
$55

$1,421
$3,109

$1,421
$5,713

$1,421
$7,855

$1,421
$9,170

$1,421
$2,979

$1,421
($413)

Discounting
Discount Rate = Cost of Capital
Cumulative Discount Factor

0.0%

Price or Cost / Unit

Cash Fixed Costs:

Lease Payment
Property Taxes
Administration
Advertising
Other
Total Cash Fixed Costs

Working Capital
Work Cap / Next Yr Unit Sales
Working Capital

$0.87
$1,740

Cash Flow Forecasts

Sales Revenue
Variable Costs
Gross Margin
Cash Fixed Costs
Depreciation
Total Fixed Costs
Operating Profit
Taxes
Net Profit
Add Back Depreciation
Operating Cash Flow
Investment in Working Capital
Investment in Plant & Equip
Investment Cash Flow

($1,740)
($11,350)
($13,090)

($1,810)

($1,544)

($1,277)

($805)

$3,444

$1,843

($1,810)

($1,544)

($1,277)

($805)

$3,444

$1,843

$1,888
$1,400
$3,288

Cash Flows
Present Value of Each Cash Flow
Net Present Value

($13,090)
($13,090)
$3,180

($1,754)
($1,549)

$1,565
$1,213

$4,436
$2,996

$12,614
$6,343

$4,822
$2,082

$2,874
$1,063

$7,051
$4,122

No. 12
Finance 305, FALL 2012
HW 18
Page 2

No. 12
Finance 305, FALL 2012
HW 18
Page 3

Data Table: Sensitivity of the Net Present Value to Unit Sales and Date 0 Real Cost of Capital
Input Values for Unit Sales Scale Factor
Out Formula: Net Present Value
$3,180
80%
90%
100%
110%
120%
9.0% ($1,324) $1,667
$4,658
$7,649 $10,640
Input Values for
11.0% ($2,336)
$422
$3,180
$5,938
$8,696
Date 0 Real Cost of Capital
13.0% ($3,246)
($698) $1,851
$4,399
$6,947
15.0% ($4,065) ($1,706)
$652
$3,010
$5,369
17.0% ($4,803) ($2,617)
($431) $1,755
$3,942

Sensitivity of Project NPV to Unit Sales and Cost of Capital

$15,000
$10,000

Project NPV

$5,000

9.0%

11.0%

13.0%

15.0%

17.0%
80%

90%

100%

Unit Sales Scale Factor

110%

120%

$10,000 -$15,000
$0

$5,000 -$10,000

($5,000)

$0 -$5,000
($5,000)-$0

Real Cost of Capital