Question 2 You are an analyst for a financial services firm that was engaged one month ago to conduct sensitivity analysis on a new project for a client. Fortunately, the client is an alum of the University of Melbourne and has asked that the approach taught in Corporate Financial Decision Making be used. The project involves a contract with a high quality and low risk customer who has guaranteed that they will pay $60 per unit of the product to your client at the end of each of each of the eight years of the project's life. The only uncertainty your client faces is how many units their customer will purchase (as determined by the quality of your item relative to competitors) and the variable cost per unit your client faces in producing the product – with most of that variable cost being taken up by the cost of labour. You collect the following information. Optimistic estimate 80,000 Pessimistic estimate Expected 60,000 Variable Sales volume demanded p.a Variable cost per unit 40,000 $55 $40 $35 You also know that the project will require an initial investment of $500,000 at the commencement of the project and then another investment of $500,000 six months into the project. The required rate of return from the project is 13% p.a. (a) Provide a ranking of the variables from most to least important (show all workings). (b) Provide a plausible specific (i.e. real-world linked) explanation as to why the distance between the pessimistic and expected values of the variable cost per unit is not the same as the distance between the variable's optimistic and expected values.
Question 2 You are an analyst for a financial services firm that was engaged one month ago to conduct sensitivity analysis on a new project for a client. Fortunately, the client is an alum of the University of Melbourne and has asked that the approach taught in Corporate Financial Decision Making be used. The project involves a contract with a high quality and low risk customer who has guaranteed that they will pay $60 per unit of the product to your client at the end of each of each of the eight years of the project's life. The only uncertainty your client faces is how many units their customer will purchase (as determined by the quality of your item relative to competitors) and the variable cost per unit your client faces in producing the product – with most of that variable cost being taken up by the cost of labour. You collect the following information. Optimistic estimate 80,000 Pessimistic estimate Expected 60,000 Variable Sales volume demanded p.a Variable cost per unit 40,000 $55 $40 $35 You also know that the project will require an initial investment of $500,000 at the commencement of the project and then another investment of $500,000 six months into the project. The required rate of return from the project is 13% p.a. (a) Provide a ranking of the variables from most to least important (show all workings). (b) Provide a plausible specific (i.e. real-world linked) explanation as to why the distance between the pessimistic and expected values of the variable cost per unit is not the same as the distance between the variable's optimistic and expected values.
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 2
You are an analyst for a financial services firm that was engaged one month ago to conduct sensitivity
analysis on a new project for a client. Fortunately, the client is an alum of the University of Melbourne
and has asked that the approach taught in Corporate Financial Decision Making be used. The project
involves a contract with a high quality and low risk customer who has guaranteed that they will pay $60
per unit of the product to your client at the end of each of each of the eight years of the project's life. The
only uncertainty your client faces is how many units their customer will purchase (as determined by the
quality of your item relative to competitors) and the variable cost per unit your client faces in producing
the product – with most of that variable cost being taken up by the cost of labour. You collect the
following information.
Optimistic estimate
80,000
Variable
Pessimistic estimate
Expected
60,000
Sales volume
demanded p.a
Variable cost per unit
40,000
$55
$40
$35
You also know that the project will require an initial investment of $500,000 at the commencement of the
project and then another investment of $500,000 six months into the project. The required rate of return
from the project is 13% p.a.
(a) Provide a ranking of the variables from most to least important (show all workings).
(b) Provide a plausible specific (i.e. real-world linked) explanation as to why the distance between the
pessimistic and expected values of the variable cost per unit is not the same as the distance between the
variable's optimistic and expected values.
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