A plant expansion projects 15-year NPV(12%) is $4.4 million. The project will allow the company to produce and sell more widgets. Your subordinate did a sensitivity analysis of the project by assessing three variables: (1) The EBITDA margin the company will obtain for selling the widgets. The firms current EBITDA margin is 25% of sales. A range of 22% to 28% was examined. (2) The sales price of the widget. The firm is currently selling the widget to its customer as $1.30 each. A range from $1.20 to $1.35 was examined in the analysis. (3). The third variable was how fast the plant could ramp up capacity after the production improvements were installed. In all three cases the new plant capacity will end up being 125% of its current capacity. In the slow scenario the ramp-up to that rate is slower than the base case. In the fast scenario, the production ramp-up to that ultimate rate is faster than the base case. After the sensitivity analysis is complete, your subordinate gives you the following tornado diagram (see next page). According to this analysis, what is the largest risk this project faces? Explain why that is the case. If the companys project hurdle-rate is 12%, should this project move forward? Explain why or why not.

Typically a tornado diagram is common sized by dividing all the values by the value of the base case (in this problem that would be dividing all the calculated NPVs by $4.4 million). The diagram below shows the identical tornado diagram NOT common-sized (actual $ values show

15-Year Project NPV(1296) Sensitivity Analysis EBITDA margin(22%-28%; Base-25%) 84.6% 115.4% Sales price ofitem ($120 -5135; base $1.30) 90.1% 104.9% Plant rap-up rate (slow -fast. base -ee note) 91.6% 102.7% 800% 850% 90.0% 95.0% 100.0% 1050% 110.0% 115.0% 120.0% Project NPV as a % ofthe Base Case 15-Year Project NPV(12%) Sensitivity Analysis EBITDA margin(22%-28%; Base-2520) 3.72 5.08 Salrs price of item (SL.20-S1.35: base- S1.30) 3.97 4.62 Plant ramp up ate (slow -fast; base see notes) 4.03 4.52 3.60 3.80 4.00 4.20 4.40 4.60 4.80 5.00 5.20 Project 15-year NPV(12%) in Millions of USD 15-Year Project NPV(1296) Sensitivity Analysis EBITDA margin(22%-28%; Base-25%) 84.6% 115.4% Sales price ofitem ($120 -5135; base $1.30) 90.1% 104.9% Plant rap-up rate (slow -fast. base -ee note) 91.6% 102.7% 800% 850% 90.0% 95.0% 100.0% 1050% 110.0% 115.0% 120.0% Project NPV as a % ofthe Base Case 15-Year Project NPV(12%) Sensitivity Analysis EBITDA margin(22%-28%; Base-2520) 3.72 5.08 Salrs price of item (SL.20-S1.35: base- S1.30) 3.97 4.62 Plant ramp up ate (slow -fast; base see notes) 4.03 4.52 3.60 3.80 4.00 4.20 4.40 4.60 4.80 5.00 5.20 Project 15-year NPV(12%) in Millions of USD