6. Sensitivity and scenario analysis Different techniques for analyzing project risk require different input variables and assumptions. Suppose you are using the scenario analysis technique to evaluate project risk. You would change in the model to evaluate the effect of the input factors on the expected value. Kathy is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph. This curve implies that the profect is not very sensitive to changes in cost of capital. The profect's NPV is likely to if the cost of capital increases to 15%. Along with the sensitivity analysis, Kathy is including a scenario analysis for the project in her report, giving the probability of the project generating a negative NPV. Her report includes the following information about the scenario analysis: Complete the missing information in Kathy's report: The expected net present value of the project is Standard deviation of the net present value (the NPV of the profect is likely to vary by) milison. 8. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best finandal decision for the company. Drice Co0. is considering replacing an existing piece of equipment. The project involves the following: - The new equipment will have a cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years 16). - The old machine is also being depreciated on a straight-line basis, It has a book value of $200,000 (at year 0 ) and four more years of depreciation left (\$50,000 per year). - The new equipment will have a salvape value of $0 at the end of the project's life (year 6 ). The old machine has a current salvage value (at year 0 ) of $300,000. - Replacing the old machine will require an investment in net working capital (NWC) of $20,000 that will be recovered at the end of the project's life (year 6 ). - The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $700,000 in each of the next slix years (vears 1-6). Hint: Thls value represents the difference between the revenues and operating costs (including depreclation expense) generated using the new equipment and that earned using the old equipment. - The project's cost of capital is 13%. - The company's annual tax rate is 30%. Complete the following table and compute the incremental cash flows associated with the replatement of the old equipment with the new equipment