You have been asked to perform a sensitivity analysis on a company\'s plan to mo
ID: 1091192 • Letter: Y
Question
You have been asked to perform a sensitivity analysis on a company's plan to modernize its facilities to determine the impact of possible errors in estimating the net annual savings. The initial investment in the modernization is $30,000. The expected net annual savings are $ 13,000. The salvage value is $7,000 after a 7-year planning horizon. MARR is 12 percent per year. Determine if the modernization is economically attractive based on the initial estimates and an annual worth (AW) analysis. Determine the AW if the net annual savings change by the following percentages from the initial estimate: -80 percent, -60 percent, -40 percent, -20 percent, +20 percent, +40 percent. Determine the percentage change in net annual savings that causes a reversal in the decision regarding the attractiveness of the project.Explanation / Answer
a) Annual worth = -30000 + 13000/ ( 1 + 0.12)^1 + 13000/ ( 1 + 0.12)^2 + 13000/ ( 1 + 0.12)^3 + 13000/ ( 1 + 0.12)^4 + 13000/ ( 1 + 0.12)^5 + 13000/ ( 1 + 0.12)^6 +
13000/ ( 1 +0.12)^7 + 7000/ ( 1 + 0.12)^7
= -30000 + 11607.14 + 10363.52 + 9253.14 + 8261.74 + 7376.55 + 6586.20 + 5880.54 + 3166.44
= 22132.13
b) for -80% net saving = 13000*(1-0.8) = 13000 *0.2 = 2600
for -60% net saving = 13000*(1-0.6) = 13000 *0.4 = 5200
for -40% net saving = 13000*(1-0.4) = 13000 *0.6 = 7800
for -20% net saving = 13000*(1-0.2) = 13000 *0.8 = 10400
for 20% net saving = 13000*(1+0.2) = 13000 *1.2 = 15600
for 40% net saving = 13000*(1+0.4) = 13000 *1.4 = 18200
now caculate annual worth as calculated in part a , using different net saving values
c) reversal is caused when annual worth becomes zero
so , 0 = - 30000 + X / ( 1 + 0.12)^1 + X / ( 1 + 0.12)^2 + X / ( 1 + 0.12)^3 + X / ( 1 + 0.12)^4 + X / ( 1 + 0.12)^5 + X / ( 1 + 0.12)^6 +
X / ( 1 +0.12)^7 + 7000/ ( 1 + 0.12)^7
X= 5879.71
so when net saving = 5879.71 then decision changes
% change = ( 5879.71 -13000)/ 130000 = - 54.77%
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