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Ex-A Your companys CFO wants to identify the risk to a project through changes in macroeconomic factors due to the changing economic environment in the

Ex-A

Your companys CFO wants to identify the risk to a project through changes in macroeconomic factors due to the changing economic environment in the US. She is unsure of the state of the economy given the erratic nature of the policies from the administration. She wants you to consider the impact of a good result out of the US and, conversely, the result of a bad result. The project that the CFO is considering has the current characteristics:

  • The cost of the project is anticipated to be $6,000,000

  • Life of the project: 3 years

  • Revenue: $5,000,000 per year

  • Fixed Costs: $750,000

  • Variable costs estimate: 25% of revenue

  • Tax rate 30%

  • The companys cost of capital is 11%

    The cost of the machine will be depreciated on a straight-line basis to zero. Identify the NPV the project under the good and bad scenarios.

    Hint: good and bad can be identified at any level you want (within reason). As this is the effect of macroeconomic effects, it is expected to affect all of the variables.

    Ex-B

    Your CFO now wants you to be more specific and identify the effects of changes in the factors that drive project profitability, namely revenue and costs. Using the same project characteristics in Ex-A, identify the sensitivity of the projects NPV to changes in each of the revenue, fixed costs and variable costs.

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