Let's now apply scenario analysis to plan the purchase of new manufacturing equipment. In the Bristol Engineerings case three earnings (E.B.I.T.) scenarios should be considered to determine which financing option is the most favourable.

So assume Bristol needs to raise $500,000 to fund the purchase of new production equipment. It is considering the following three funding options:

$500,000 in new shareholder funds (that is 500,000 shares @$1)

$250,000 in new shareholder funds (250,000 $1 shares) and $250,000 extension of the existing bank loan (the bank requires interest charges at 12% for the whole loan)

$500,000 in a finance lease package that will cost 10% per annum)

This means that Bristol will increase output and therefore earnings. Assume that due to new equipment, earnings projections have changed to:

Pessimistic ($300,000)

Normal ($400,000)

Optimistic ($460,000)

Use the charts below and over the page to calculate the projected financial outcomes:

Option 1:

	Pessimistic	Normal	Optimistic
	$ (000's)	$ (000's)	$ (000's)
E.B.I.T	300	400	460
Interest Payments	0	0	0
E.B.T	300	400	460
Less Tax	10.8	14.4	16.56
E.A.T	289.20	385.60	443.44
Less Preference Shares	13	13	13
Earnings for Ordinary Shares	276.20	372.60	430.44
R.O.E	8%	11%	15%
E.P.S	8 cents	11 cents	15 cents

Option 2:

	Pessimistic	Normal	Optimistic
	$ (000's)	$ (000's)	$ (000's)
E.B.I.T	300	400	460
Interest Payments	30	30	30
E.B.T	270	370	430
Less Tax	9.72	13.32	15.48
E.A.T	260.28	356.68	414.52
Less Preference Shares	13	13	13
Earnings for Ordinary Shares	247.28	343.68	401.52
R.O.E	8%	11%	15%
E.P.S	8 cents	11 cents	15 cents

Option 3:

	Pessimistic	Normal	Optimistic
	$ (000's)	$ (000's)	$ (000's)
E.B.I.T	300	400	460
Interest Payments	50	50	50
E.B.T	250	350	410
Less Tax	9.00	12.60	14.76
E.A.T	241	337.40	395.24
Less Preference Shares	13	13	13
Earnings for Ordinary Shares	228	325.40	382.24
R.O.E	8%	11%	15%
E.P.S	8 cents	11 cents	15 cents