Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

As a financial analyst at Glencolin International ( GI ) you have been asked to revisit your analysis of the two capital investment alternatives submitted

As a financial analyst at Glencolin International (GI) you have been asked to revisit your analysis of the two capital investment alternatives submitted by the production department of the firm. (Detailed discussion of these alternatives is in the Mini Case at the end of Chapter 10.) The CFO is concerned that the analysis to date has not really addressed the risk in this project. Your task is to employ scenario and sensitivity analysis to explore how your original recommendation might change when subjected to a number of what-ifs.
In your discussions with the CFO, the CIO, and the head of the production department, you have pinpointed two key inputs to the capital budgeting decision: initial software development costs and expected savings in production costs (before tax). By properly designing the contract for software development, you are confident that initial software costs for each alternative can be kept in a range of + or 15% of the original estimates. Savings in production costs are less certain because the software will involve new technology that has not been implemented before. An appropriate range of these costs is + or 40% of the original estimates.
As the capital budgeting analyst, you are required to answer the following in your memo to the CFO:
a) Conduct sensitivity analysis to determine which of the two inputs has a greater input on the choice between the two projects.
b) Conduct scenario analysis to assess the risks of each alternative in turn. What are your conclusions?
c) Explain what your sensitivity and scenario analyses tell you about your original recommendations.
* We recommend using a spreadsheet in analyzing this Mini Case.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Freedom

Authors: Timothy Turner

1st Edition

1801573573, 978-1801573573

More Books

Students also viewed these Finance questions

Question

3. List ways to manage relationship dynamics

Answered: 1 week ago