B. Problem Statement (30 questions) Business is thriving and, as a result, the Soho Paving Company is contemplating the purchase of additional landscaping equipment. While the Company has done the necessary due diligence, it is doubtful that the investment would perform exactly as projected by the dealership consultant . Due to lingering uncertainty, you have been mandated by the Company to perform a one-way sensitivity analysis of your potential purchase. The current "best" guesses for the project parameters are: 1. Initial Cost (P) = $960,000 2. Salvage value (SV) = $12,133 3. Annual operating revenues (AOR) - $600,000 4. Annual operating costs (AOC) = $325,000 5. Economic life (N) - 5 years 6. MARR = 10% 7. Inflation Rate = 0%. 2 One-way Sensitivity Table Parameters -15% +10% +15% Net Present Worth (NPW) -10% -5% Reference +5% Scenario AA BB CC P AOR DD EE AOC FF GG HH KK SV N LL MM MARR NN 00 PP 29. If the sensitivity Table for this assignment was based on the Discounted Payback Method instead of the Net Present Worth (NPW) decision criterion would the breakeven parameter values calculated above be different? a) Likely; b) No; c) Differences would depend on the values of each parameter. 30. Consult the lecture notes on risk for the formula required for this question. Instead of performing conventional risk analyses (e.g., expected values; Monte Carlo simulations) to account for a risky future, some companies prefer to add a risk premium (e.g., 2 percentage points) to their risk-free MARR. Assume that the Soho Company needs to raise $800,000 to finance the purchase of landscaping equipment. If the risk-free interest rate (a risk-free rate is a MARR that includes a real (inflation-free) rate of return and an inflation rate but excludes a risk premium) is 10% (the MARR used in your sensitivity Table. the average market MARR is 12% (which is the sum of ) an inflation- free rate; il) an inflation premium; and im) a risk premium). The company's Betais 3 (Beta reflects a company's volatility relative to the overall market volatility, the higher Beta, the greater the company's volatility). Find the company's discount rate (MARR) (which includes a real rate of return, an inflation premium and the company's risk premium) used to finance the purchase of the additional landscaping equipment? 0-0-0 B. Problem Statement (30 questions) Business is thriving and, as a result, the Soho Paving Company is contemplating the purchase of additional landscaping equipment. While the Company has done the necessary due diligence, it is doubtful that the investment would perform exactly as projected by the dealership consultant . Due to lingering uncertainty, you have been mandated by the Company to perform a one-way sensitivity analysis of your potential purchase. The current "best" guesses for the project parameters are: 1. Initial Cost (P) = $960,000 2. Salvage value (SV) = $12,133 3. Annual operating revenues (AOR) - $600,000 4. Annual operating costs (AOC) = $325,000 5. Economic life (N) - 5 years 6. MARR = 10% 7. Inflation Rate = 0%. 2 One-way Sensitivity Table Parameters -15% +10% +15% Net Present Worth (NPW) -10% -5% Reference +5% Scenario AA BB CC P AOR DD EE AOC FF GG HH KK SV N LL MM MARR NN 00 PP 29. If the sensitivity Table for this assignment was based on the Discounted Payback Method instead of the Net Present Worth (NPW) decision criterion would the breakeven parameter values calculated above be different? a) Likely; b) No; c) Differences would depend on the values of each parameter. 30. Consult the lecture notes on risk for the formula required for this question. Instead of performing conventional risk analyses (e.g., expected values; Monte Carlo simulations) to account for a risky future, some companies prefer to add a risk premium (e.g., 2 percentage points) to their risk-free MARR. Assume that the Soho Company needs to raise $800,000 to finance the purchase of landscaping equipment. If the risk-free interest rate (a risk-free rate is a MARR that includes a real (inflation-free) rate of return and an inflation rate but excludes a risk premium) is 10% (the MARR used in your sensitivity Table. the average market MARR is 12% (which is the sum of ) an inflation- free rate; il) an inflation premium; and im) a risk premium). The company's Betais 3 (Beta reflects a company's volatility relative to the overall market volatility, the higher Beta, the greater the company's volatility). Find the company's discount rate (MARR) (which includes a real rate of return, an inflation premium and the company's risk premium) used to finance the purchase of the additional landscaping equipment? 0-0-0