Your boss wants you to conduct a sensitivity and scenario analysis to determine whether the following project is a winner. You are entering an established market, and you know the market size will be 1,100,000 units. You are unsure of your exact market share, the price you will be able to charge, and your variable cost per unit, but have determined a range of possible values for each (in the table below). Your initial investment cost is $150 million, and that investment will depreciate in straight-line form over the 20-year life of the project. There are no new NWC requirements, and there will be no salvage value at the end of the 20 years. The tax rate is 35%. The discount rate is 18%. a) Use the following table to conduct a full sensitivity analysis for the project. Make sure to include the NPV for the expected outcome as part of the full sensitivity analysis. Also add the best- and worst-case scenarios to the full sensitivity analysis. Show all of your work (written out, not an Excel file). Round to the nearest dollar. Pessimistic Expected Optimistic Market Share 4.0% 5.0% 6.0% Price/unit $2310 $2500 $2690 VC/Unit $2000 $1540 $1000 FC $1.8 Million $2 Million $2.2 Million b) Using the information above, what is the break-even market share for the project? Show your work, and round to the nearest 0.01%.
Your boss wants you to conduct a sensitivity and scenario analysis to determine whether the following project is a winner. You are entering an established market, and you know the market size will be 1,100,000 units. You are unsure of your exact market share, the price you will be able to charge, and your variable cost per unit, but have determined a range of possible values for each (in the table below). Your initial investment cost is $150 million, and that investment will
a) Use the following table to conduct a full sensitivity analysis for the project. Make sure to include the NPV for the expected outcome as part of the full sensitivity analysis. Also add the best- and worst-case scenarios to the full sensitivity analysis. Show all of your work (written out, not an Excel file). Round to the nearest dollar.
|
Pessimistic |
Expected |
Optimistic |
|
|
Market Share |
4.0% |
5.0% |
6.0% |
|
Price/unit |
$2310 |
$2500 |
$2690 |
|
VC/Unit |
$2000 |
$1540 |
$1000 |
|
FC |
$1.8 Million |
$2 Million |
$2.2 Million |
b) Using the information above, what is the break-even market share for the project? Show your work, and round to the nearest 0.01%.
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