A colleague has prepared a cash flow forecast for a potential project in Excel and has included coding on three lines of the forecast to facilitate sensitivity testing - Net Smelter Return (NSR), on-site cash operating costs, and capital cost.

Most of the cells in this spreadsheet are protected and cannot be altered. The following cells (shaded in green) are not protected, and you may enter values in them: B5, B6, and B10. You will be asked for a password the first time you try to input a value in one or more of these cells - the password (case sensitive) is open; after entering the password you should be able to input into any/all of these cells.Two cells shaded in yellow provide the values of NPV (cell C23) and IRR (cell C26).

You may assume that the formulae and calculations in the forecast are all correct. To begin, you will need to vary the number in the green shaded cell for each of the three named line items individually, while the value of the other two remains at 100% (base case value).

Part 1 - (a) What degree of adverse change in each of NSR, cash operating costs, and capital costs (individually, while the other two variables are assumed to remain at 100% of their base case values) can the project withstand and still generate a positive NPV?

(b) Do the answers you calculated for (a) allow you to rank the three variables in order of the risk an adverse change in the variable (others remaining at 100%) poses to project NPV being negative? Why or why not?

Part 2

Note, you will be asked again (i.e. each time you open the spreadsheet) for a password the first time you try to input a value in one of the cells B5, B6, and B10 - the password (case sensitive) is open; after entering the password you should be able to input into any/all of these three cells

You are provided with the following additional information: the potential for adverse change in NSR relative to the base case value is expected to be limited by hedging to no more than -5%

(a)Assuming NSR of 95% of base case value, what degree of adverse change in each of cash operating costs and capital costs (individually, while the other variable is assumed to remain at 100% of its base-case value) can the project withstand and still generate a positive NPV?

(b)Assuming NSR of 95% of base case value, and each of cash operating costs and capital costs at 102% of base case value, what is the NPV of the project?

(c)Based on your answers to (a) and (b), and your knowledge of how well feasibility study estimates have performed historically in predicting capital and operating costs, do you consider the projected economics of this potential project to be relatively robust, or relatively fragile?