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A project under consideration costs $100,000, has a five-year life, and has no salvage value. Depreciation is straight-line to zero. The required return is 10 percent, and the tax rate is 30 percent. The weights for the Net Present Values are: 50% for base case; 30% for the Upper Bound and 20% for the Lower Bound

In addition, we have compiled the following information:

Bound

Base Case

Lower Bound

Upper

Unit sales

500

450

550

Price per unit

$80

$75

$85

Variable costs per unit

$60

$55

$65

Fixed costs per year

$25,000

$20,000

$30,000

(a) Find the Free Cash Flows for the Three Variations detailed above using the following Template

Base Case

Lower Bound

Upper Bound

Sales

$_____

Variable costs

______

Fixed costs

______

Depreciation

_______

EBIT

________

Taxes (34%)

________

Net income

$ ______

(b) What is the Free cash flows (also called the operating cash flows (OCF) for each of the scenarios

I. Base Case: _______

II. Lower: ________

III. Upper: ________

(c) Find the Net Present Value for each scenario

IV. Base Case: ______

V. Lower: ______

VI. Upper: _______

(d ) The Weighted average Net Present Value for the investment is $______

2. Most of the time we are actually unable to observe the relevant market value because we are doing a projection. Thus, since we are using estimates then the question becomes:

a. None of the above

b. are our estimates using assumptions?

c. The base case is most important as that is our most realistic simulation?
d. are our estimates at least close to the true values?

3. An equipment costing $50,000 is depreciated on a straight-line depreciation charge over a 5-year period. What will be the income amount shielded away per year from taxes assuming a marginal tax rate of 35%?

a. $10,000

b. $650

c. $350

d. None of the above

4. Assuming the following NPV and the accompanying weights, What will be the NPV expectation in dollar terms when we assume the following:

NPV Base Case $10,000 with a probability of 30%

NPV Lower Bound -$5,000 with a probability of 50%

NPV Upper Bound 15,000 with a probability of 20%

Then the Weighted, meaning the expected net present value (NPV) will be

a. -$5,000

b. $3,500

c. $7,500

d. Other $ ______

5. An analysis of the change in a project’s NPV when a single variable is changed is called _____ analysis.

a. forecasting

b. Simulation

c. sensitivity

d. scenario

6. If the Net Present Value (NPV) is greater than zero, then the payback period of the project using the discounted cash flow (DCF) method must be:

a. equal to zero

b. less than the “useful life” of the project

c. greater than the useful life of the project

d. equal to the useful life of the project

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