Calculate the lowest and highest NPVs that are possible for Problem 10.38. Compare these values with the distribution of NPVs from Problem 10.38. What are the probabilities of getting an NPV within $5 million of these values?

Problem 10.38

For Problem 10.8, uncertainties associated with predicting the revenues and cost of manufacturing are estimated to be as follows: 

Revenue: Expected range of variation from base case, low = $45 million, high = $53.5 million

COM_d: Expected range of variation from base case, low = $16 million, high = $21.5 million Using the above information, evaluate the expected distribution of NPVs and DCFRORs for the project. Would this analysis change your decision compared to that for the base case?

Problem 10.8

The projected costs for a new plant are given below (all numbers are in $10⁶).

Land cost = $7.5

Fixed capital investment = $120 ($60 at end of year 1, $39.60 at end of year 2, and $20.40 at end of year 3)

Working capital = $35 (at startup)

Startup at end of year 3

Revenue from sales = $52

Cost of manufacturing (without depreciation) = $18

Tax rate = 40%

Depreciation method = MACRS over 5 years

Length of time over which profitability is to be assessed = 10 years after startup

Internal rate of return = 9.5% p.a.

For this project, do the following:

Draw a cumulative (nondiscounted) after-tax cash flow diagram.

From Part (a), calculate the following nondiscounted profitability criteria for the project:

Cumulative cash position and cumulative cash ratio

Payback period

Rate of return on investment

Draw a cumulative (discounted) after-tax cash flow diagram.

From Part (c), calculate the following discounted profitability criteria for the project:

Net present value and net present value ratio

Discounted payback period

Discounted cash flow rate of return (DCFROR)