1. Suppose you are a financial analyst working for XZ Corporation, which is considering a new project that will require a significant investment. As part of your analysis, you are tasked with running scenario and sensitivity analysis on the firm's cash flow. The project is expected to have a lifespan of ten years and the discount rate is 7%, with an initial investment of $5,000,000.
2. Run scenario analysis on the firm's cash flow by analyzing the base case, worst case, and best-case scenarios. Assume that the base case cash flow for each year is $850,000. In the worst-case scenario, the cash flow is expected to decrease by 25%, and in the best case scenario, the cash flow is expected to increase by 15%. Calculate the net present value (NPV) for each scenario and discuss the implications of your findings.
3. Run sensitivity analysis on the firm's cash flow by changing the project lifespan and keeping all other variables constant. Assume that the base case cash flow for each year is $850,000. Calculate the NPV for each change in lifespan till you obtain a year that generates positive NPV and discuss the implications of your findings.
4. Based on your analysis, what recommendations would you make to XZ Corporation regarding this project? What are the key factors that XZ Corporation should consider when making a decision about whether to proceed with the project or not?