Breakeven and Sensitivity Analysis The goal of this exercise is to explore the t

Question

Breakeven and Sensitivity Analysis

The goal of this exercise is to explore the trade-offs associated with the NPV of a solar collector project. The QFM for this project is:

1. Development costs are $100K/qtr for Y1.

2. Ramp-Up costs are 10K for Y1 Q4, 50K for Y2 Q1, and 5K for Y2 Q2.

3. Production costs are 20K for Y2 Q1, $22K for Y2 Q2, 25K for Y2 Q3, and 30K for Y2 Q4.

4. Marketing costs are 30K/qtr for Y2.

5. Product support costs are 15K/qtr for Y2.

6. Material costs are 5K/qtr for Y2.

7. Sales Revenue is predicted to be 300K/qtr for Y2.

8. The discount rate our company is using is 8% annually for Y1 and Y2. Original NPV to the nearest dollar = ____________

Your team has presented a project proposal to the management team charged with the responsibility for project approval. The management team has some questions (express all answers to the nearest dollar):

1. The project NPV = _________________ (same as NPV above)

2. How would a 30-percent reduction in marketing costs affect the original NPV?

3. What is the trade-off rule for the marketing cost? Trade-off rules are expressed as the (percent change in NPV/ |percent change in cost or other factor|)*100.

4. Suppose the 30-percent reduction in marketing costs also led to a 10-percent reduction in sales, how would this affect the original NPV?

5. How would a 20-percent increase in development costs (and end one quarter sooner) impact the bottom line if it allowed all other activities to begin one quarter earlier thus ending the project one quarter sooner? How would this affect the original NPV?

6. Suppose the raw-material market shifted in an adverse way and we had to pay 50 percent more for material costs? How would this affect the original NPV?

The answer for all of the problems should be in the templet I attached below.

Check your answer the answer are

Explanation / Answer

1 ) the assumptions are

1. Development costs are $100K/qtr for Y1.

2. Ramp-Up costs are 10K for Y1 Q4, 50K for Y2 Q1, and 5K for Y2 Q2.

3. Production costs are 20K for Y2 Q1, $22K for Y2 Q2, 25K for Y2 Q3, and 30K for Y2 Q4.

4. Marketing costs are 30K/qtr for Y2.

5. Product support costs are 15K/qtr for Y2.

6. Material costs are 5K/qtr for Y2.

7. Sales Revenue is predicted to be 300K/qtr for Y2.

8. The discount rate our company is using is 8% annually for Y1 and Y2. or 2% per quarter

9 ) the period is divideded in 4 quaters in a year or 8 quarters in 2 years

the calculation are given below for NPV

The NPV is $ 361,775 or $362,000 in nearest dollars

2 ans ) if there is 30% reduction in marketing cost the new NPV will be calculated below

The new NPV is $ 394,068 or $ 394,000 in nearest thousands

3 Ans ) let us calculate the % change in NPV , which is calculated as below

% change in NPV = (394000-362000)/362000

= 32000 / 362000

= 8.84%

the trade off percentage is as per formula is calculated below

= 8.84/30 * 100

= 29.47 % or 29.50 % round off i decimal

4 Ans ) if there is 30% reduction in marketing cost and 10% in sales revenue the new NPV is calculated below

The new NPV is $ 286,425 or $ 286,000 to rounding off to nearest decimal

Problem 1 Year 1 Year 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Development cost 100,000 100,000 100,000 100,000 Ramp-up Cost 10,000 50,000 5,000 Production cost 20,000 22,000 25,000 30,000 Marketing cost 30,000 30,000 30,000 30,000 Product support costs 15,000 15,000 15,000 15,000 Material cost 5,000 5,000 5,000 5,000 Sales revenue 300,000 300,000 300,000 300,000 Period cash flow -100,000 -100,000 -100,000 -110,000 180,000 223,000 225,000 220,000 Discount factor,i 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Time period ,t 0 1 2 3 4 5 6 7 1 0.980392 0.961169 0.942322 0.923845 0.905731 0.887971 0.87056 Period present value ,p -100000 -98039 -96117 -103655 166292 201978 199794 191523 Running NPV -100000 -198039 -294156 -397812 -231519 -29541 170252 361775 Project NPV 361775

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