Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

Suppose a friend of yours is considering investment in a multiyear project. The cost is $14,000. Annual cash flows are estimated to be $5,000 per

Suppose a friend of yours is considering investment in a multiyear project. The cost is $14,000. Annual cash flows are estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11%, but it could be as low as 9.5% and as high as 12%. The basis of the decision to invest will be whether the project has a positive net present value. Using two input variables (annual cash flow and interest rate), and the base values of $5000 for the cash flows and 11% for the interest rate, construct a tornado diagram of the possible investment NPV. On the basis of the tornado diagram, which input is NPV more sensitive to?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started