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The managers of a company are considering an investment with the following estimated cash flows. The MARR is 15% per year. Capital investment Annual profits
The managers of a company are considering an investment with the following estimated cash flows. The MARR is 15% per year. Capital investment Annual profits Market value Useful life $50,000 15,000 5,000 5 years The company is inclined to make the investment as the PW(15%) = $2,769. However, you wish to examine the sensitivity of the decision to errors in estimating annual profits and the market value. a) Determine the sensitivity of the decision to invest to changes in annual profits. Hold all other factors constant at their original estimated values. b) Determine the sensitivity of the decision to invest to changes in the market value. Hold all other factors constant at their original estimated values. c) Explain to management why the decision to invest is more sensitive to changes in annual profits or to changes in the market value
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