Answered: A Example of sensitivity B graph i am…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter11: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 11.18E

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Question

Perform a sensitivity analysis graph and data table on the cost per unit, unit sales, and salvage value. Assume each of these variables can vary from its base- case, or expected, value by plus 0%, 10%, 20%, 30% and minus -10%, -20%, -30%. Discuss the results. An example of what I want is in the image. "Mini Case Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 25%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%."

A
Example of sensitivity
B graph i am looking for
E
F
209
210
NPV (S)
211
$18,000
Price
212
$15,000
213
214
$12,000
215
$9,000
216
217
$6,000
Units
218
$3,000
219
220
$0
Equip.
221
-$3,000
222
223
-$6,000
224
-$9,000
225
VC/Unit
-$12,000
226
227
-$15,000
228
-30%
-15%
0%
15%
30%
229
% Deviation from Base
230
231
232
Deviation
Data for Sensitivity Graph
NPV with Variables at Different Deviations from Base
233
from Base
Equip.
Price
Units
VC/Unit
234
-30%
$3,446
-$14,264
-$2,296
$13,037
235
0%
$1,070
$1,070
$1,070
$1,070
236
30%
-$1,306
$16,403
$4,436
-$10,898
237
Range
$4,752
$30,667
$6,732
$23,935

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