Cash Flow Forecast Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) Oper. income before taxes (EBIT) Taxes on operating income (20%) Net operating profit after taxes Add back depreciation Equipment purchases Cash flow due to change in NOWC Net cash flow due to salvage Net Cash Flow (Time line of cash flows) Key Results: Appraisal of the Proposed Project Net Present Value (at 10%) = IRR = MIRR = Payback = Discounted Payback = Data for Payback Years 0 1 2 3 4 Years 0 Years 2 3 4 Net cash flow Cumulative CF Part of year required for payback Data for Discounted Payback Years Years 0 1 2 3 4 Net cash flow Discounted cash flow Cumulative CF $0 $0 $0 $0 $0 Part of year required for discounted payback Chapter: 11 Cash Flow Estimation and Risk Analysis a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. Input Data (in thousands of dollars) Scenario name Probability of scenario Equipment cost Net operating working capital/Sales Base Case Note: the items in red will be used in a scenario analysis. 50% $25,000 Key Results: 12% First year sales (in units) 2,000 NPV = Sales price per unit $21.00 IRR = Variable cost per unit (excl. depr.) $15.00 Payback = Nonvariable costs (excl. depr.) $1,500 Inflation in prices and costs 2.5% Estimated salvage value at year 4 $1,000 Depreciation years Year 1 Year 2 Year 3 Year 4 Depreciation rates Tax rate 20.00% 32.00% 19.20% 11.52% 20% WACC for average-risk projects 10% Intermediate Calculations Units sold 0 1 2 3 4 Sales price per unit (excl. depr.) Variable costs per unit (excl. depr.) Nonvariable costs (excl. depr.) Sales revenue Required level of net operating working capital Basis for depreciation Annual equipment depr. rate Annual depreciation expense Ending Bk Val: Cost - Accum Dep'rn Salvage value Profit (or loss) on salvage Tax on profit (or loss) Net cash flow due to salvage 20.00% 32.00% 19.20% 11.52% b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables' values at 10% and 20% above and below their base- case values. % Deviation 1st YEAR UNIT SALES from Base Case Base 2,000 -20% -10% 0% 10% 20% NPV $0 Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case 1st Year Unit Sales in Cell B79 should be the number 2,000 and NOT have the formula =D10 in that cell. This is because you'll use D10 as the column input cell in the data table and if Excel tries to iteratively replace Cell D10 with the formula =D10 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! VARIABLE COST % Deviation SALES PRICE % Deviation from Base Case Base $21.00 NPV from Base $0 Base Case $15.00 -20% -20% -10% -10% 0% 0% 10% 10% 20% 20% Deviation NPV at Different Deviations from Base from Sales Variable Base Case Units Sold Price Cost/Unit -20% $0 $0 $0 -10% $0 $0 $0 0% $0 $0 $0 10% $0 $0 $0 20% $0 $0 $0 Range $0 $0 $0 NPV $0 c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Hint: Use Scenario Manager. Go to the Data menu, choose What-If-Analyis, the choose Scenario Manager. After you create the Scenario's, you can pick a scenario and type in the resulting NPV (but be sure to return the Scenario to the base- case afterward). Or you can create a Scenario Summary and use a cell reference to the Scenario Summary worksheet to show the NPV for each scenario.) Scenario Probability Unit Sales Sales Price per Unit Variable Costs per Unit NPV Best Case 25% 2,400 $24.00 $12.00 Base Case 50% 2,000 $20.00 $15.00 Worst Case 25% 1,600 $16.00 $18.00 Expected NPV = Standard Deviation = Coefficient of Variation = Std Dev / Expected NPV = d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and CV range of firm's average-risk project: 0.8 to 1.2 Low-risk WACC = 8% WACC = 10% High-risk WACC = 13% Risk-adjusted WACC = Risk adjusted NPV = IRR = Payback = e. On the basis of information in the problem, would you recommend that the project be accepted?