Please I will like an answer step by step.Thank you.Given the following sensitivity analysis, which of the following statements is true? Estimated Annual Net Cash Flow $500,000 $600,000 $700,000 Present value of annual net cash flows (× 4.487)$2,243,500 $2,692,200 $3,140,900 Present value of residual value50,000 50,000 50,000 Total present value$2,293,500 $2,742,200 $3,190,900 Amount to be invested(3,000,000)(3,000,000)(3,000,000)Net present value(706,500)(257,800)190,900 a.The investment is not justified if the annual net cash flow will be $500,000 or $600,000.b.The annual net cash flow necessary to generate a positive net present value is above $700,000.c.The total amount to be invested is $3,050,000.d.Only an annual net cash flow of $700,000 will allow for a positive residual value.

While choosing which investment should be undertaken, different techniques are used. Techniques used are: NPV, PI, IRR, MIRR and payback period. NPV is most commonly used because it works with the conventional as well as cash flows which are not conventional.Sensitivity analysis is a technique of how change in one variable can affect the other variables. From the above calculations, it is clear that statement A is true because: When annual cash inflows are $500,000, NPV of the project is negative i.e. –$706,500. Also, when annual cash inflows are $600,000, NPV of the project is still negative i.e. –$257,800. Thus, investment is not justified if annual cash inflow will be $500,000 or $600,000. Thus, statement is true. When annual cash inflows are $700,000, NPV is positive i.e. $190,900. This concludes that for getting positive NPV from the project, annual cash flows should be $700,000 or above. But statement says that for positive NPV, annual cash flow should be above $700,000 which is false because NPV is positive even at annual cash inflow $700,000. Total amount that should be invested is $3,000,000. Thus, statement is false. Annual net cash flow has nothing to do with the residual value. Residual value is $50,000 and it will remain same irrespective of the annual cash inflow. Thus, state

Answered: Given the following sensitivity…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

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Please I will like an answer step by step.

Thank you.

Given the following sensitivity analysis, which of the following statements is true?

	Estimated Annual Net Cash Flow
	$500,000	$600,000	$700,000
Present value of annual net cash flows (× 4.487)	$2,243,500	$2,692,200	$3,140,900
Present value of residual value	50,000	50,000	50,000
Total present value	$2,293,500	$2,742,200	$3,190,900
Amount to be invested	(3,000,000)	(3,000,000)	(3,000,000)
Net present value	(706,500)	(257,800)	190,900

a.The investment is not justified if the annual net cash flow will be $500,000 or $600,000.

b.The annual net cash flow necessary to generate a positive net present value is above $700,000.

c.The total amount to be invested is $3,050,000.

d.Only an annual net cash flow of $700,000 will allow for a positive residual value.

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