How do you do this problem? I can get the right answer! Thanks! You are asked to

Question

How do you do this problem? I can get the right answer! Thanks!

You are asked to perform a scenario analysis instead of a sensitivity analysis. Assume that the values of the three scenarios (optimistic, most likely and pessimistic) are to be populated from NPW values from the sensitivity tables shown above.
The dollar value of the project’s life (duration) for the optimistic scenario would be a) 5 years; b) 1.15(5) years; c) 0.85(5) years; d) 0 years.

I. Initial Cost (P) = $450,000 2. Salvage value (SV)= $45,265 3. Annual operating revenues (AOR) = $300,000 4. Annual operating costs (AOC)= $180,000 5. Economic life (N) = 5 years 6. MARR= 10% 7. Inflation Rate=0% One-way Sensitivity Table Net Present Worth (NPW Parameters -15% -10%| -5% | Reference l +5% +10% +15% Scenario AOR AOC SV MARR

Explanation / Answer

Answer:

In the said example, we have taken following assumptions:

   Pessimistic Expected Optimistic

Investment    -475,000    -450,000    -425,000

Revenue    280,000 300,000 320,000

Expenses 61% 60% 0f revenue 60%

Preparing Income Statement for Optimistic Scenario

Operating Revenue $320,000

Operating Expenses    $192,000

Operating Cash Flow $128,000

We have considered this cash flow to sustain for next 5 years.

Calculating NPV:

NPV:    $60,000 @ 10% cost of capital.

Payback period: 3.32 years.

Project's Valuation will be positive in 5 years.

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