Breakeven and Sensitivity Analysis

The goal of this exercise is to explore the trade-offs associated with the NPV of a solar collector project. The QFM for this project is:

1. Development costs are $100K/qtr for Y1.

2. Ramp-Up costs are 10K for Y1 Q4, 50K for Y2 Q1, and 5K for Y2 Q2.

3. Production costs are 20K for Y2 Q1, $22K for Y2 Q2, 25K for Y2 Q3, and 30K for Y2 Q4.

4. Marketing costs are 30K/qtr for Y2.

5. Product support costs are 15K/qtr for Y2.

6. Material costs are 5K/qtr for Y2.

7. Sales Revenue is predicted to be 300K/qtr for Y2.

8. The discount rate our company is using is 8% annually for Y1 and Y2. Original NPV to the nearest dollar = ____________

Your team has presented a project proposal to the management team charged with the responsibility for project approval. The management team has some questions (express all answers to the nearest dollar):

1. The project NPV = _________________ (same as NPV above)

2. How would a 30-percent reduction in marketing costs affect the original NPV?

3. What is the trade-off rule for the marketing cost? Trade-off rules are expressed as the (percent change in NPV/ |percent change in cost or other factor|)*100.

4. Suppose the 30-percent reduction in marketing costs also led to a 10-percent reduction in sales, how would this affect the original NPV?

5. How would a 20-percent increase in development costs (and end one quarter sooner) impact the bottom line if it allowed all other activities to begin one quarter earlier thus ending the project one quarter sooner? How would this affect the original NPV?

6. Suppose the raw-material market shifted in an adverse way and we had to pay 50 percent more for material costs? How would this affect the original NPV?