Use the information above to answer the following.

A. If there are only two outcomes that can occur, the situation as described in Question 1

and the situation as described in Question 2, what percentage chance of a recession

would lead the company to accept the project?

B. Make a diagram showing how the NPV changes as the chance of recession increases

from 0% probability to 100%.

Depreciaion Depreciation Calculation Inisal Cost Useful ufesean Changes Due To Recessions 92: $22,500,000 Decrease in anual rev 20 20% Salvage Value Annual Depreciation so $1,125,000 Decrease in cost 10% Ater tax cash fow fom Sale of Asset in Year X Inisal Cost 22,500,000 New Cost of Capital Accum. Depn Net Book Value Sales Proceeds Taxable (Gain on Sale) 22,500,000 10% S50.000 50.000 Tax 15,000 Net Cash Rew ( ProcoadsS 35,000 Operating Cash Flow: Revenue Cost 15 10 11 12 13 14 16 17 18 19 20 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 s 4,000,000 $ 4,000,000 $ 4,000,000 s 4,000,000 $ 4,000,000 $ 4,000,000$ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 * $ 4,000,000 4,000,000 $ 4,000,000 S 4,000,000 S $ 450,000 s 436,500 $ $ 391,500 $ 391,500 s 4,000,000 $4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $4,000,000 $4,000,000 S 423,000 $ 409,s00 $ 396,000 $ 382,500 $ 369,000 ass s00 s 342,000 $ 328 500 $ 31s,000 $ 301,500 $ 288,000 $ 391,500 $ 391,5c0 $ 391,500 s 391,500 $ 391,500 $ 391,500 s 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 s Gross Profit Marketing Labour Environment Test 4,000,000 274,500 $ 261,000 $ 247,500 $ 234,000$ 220,500 s 207,000 s 342,000 $ 328,500 $ 193,500 391,500 562 500 s $62,500 45,000 $ 45,000 $ 45,000 s 45,000 s $ 562,500 $ $62,500 $ 45,000 $ 45,000 S 45,000 s 45,000 $ 45,000 s 45,000 $ 45,000 $ 45,000 s 45,000 s 45,000 $ 45,000 s Ovehead 45,000 $ 180,000 s $ 2,933,500 S 2,947,000 $ 2,960,500 $ 2,974,000 $ 2,425,000 $ 3,001,000 $ 3,014,500 $ 3,028,000 $ 3,041,500 $2,492,500 $ 3,068,500 $ 3,082,000 $ 3,095,500 $ 3,109,000 $2,560,000 45,000 $ 45,000 $ 45,000 s 45,000 $ 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s $ 180,000 s 180.000 s 180,000 s r* r S $1,125.000 $1,125.000 $1,125,000 $1,125.000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 S1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1125,000 * S $ 180,000 s 180,000 s 180,00 s 180,000 s 180,000 s 180,00 180.000 s 1a0.000 s 180,000 $ 180,000 $ 180,000 $ Parking Cost EBITDA 180,000 0 r $3,149,500 2,627,500 Depreciation & Amorisation $1,125.000 $1.125,000 $1,125.000 1,835,500 $ 1,849,000 $ 1,300,000 $1,876,000 $ 1,889,500 $ 1,903,000 S 1,916,500 $ 1,367,500 $ 1,943,500 $ 1,957,000 $ 1,970,500 $ 1,984,000$1,435,000 550,650 s s54,700 s 390,000 s 562,800 s s66,850 s r $2,024,500 $1,808,500 S 1,822,000 S s 542,sso s $ 1,265,950 S 1,275,400 S 1,502,500 s 574,950 s 410,250 s 587,100 s s91,150 s 595,200 $ 430,50 s 603,300 s 607,350 s 611,400 $ 615,450 s r S Tax 546,600 s 566 850 s 570.900 's sa3.050 's 450,750 910,000 $1,313,200 $ 1,322,650 $ 1,332,100 S 1,341,550 S 957,250 $ 1,360,450 $ 1,369,900 $ 1,379,350 $ 1,388,800 $1,004,500 er * Net lncome 1,284,850 $ 1,294,300 S $1,417,150 S 1,051,750 $1,125.000 S1,125.000 $1.125.000 $1,125.co0 $1.125.00o 51,125.000 S1,125.000 S1,125.000 Acd back depn $1,125,000 1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,12s,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $2,409,850 $2,419,300 $2,035,000 $2,438,200 $2,447,650 $2,457,100 $2,466,550 $2.082,250 $2,485,450 $2,4594,900 $2,504,350 $2,513,800 $2,129,500 $2,532,700 $2,542,150 $2,551,600 $2,561,050 Operading Cash Flow $2,390,950 $2,400,400 $2,176,750 Project Cash Flows Capital Spending Change in Working CapitalS Net Cash lew Present Value 19 4. 10 11 12 13 14 15 16 17 18 22,500.000 35,000 $ 1,000,000 1,000,000 23,500,000 $ 2,390,950 $ 2,400,400 $ 2409,850 $ 2,419,300 $ 2,035,000 $ 2,438,200 $ 2,447,650 $ 2,457,100 $ 2,466,550 S 2,082,250 S 2,485,450 $ 2,494,900 $ 2,504,350 $ 2,513,800 $ 2,129,500 E $2,542,150 661,962 $ so9,78s $ s1,189 $ s02,951 $ 458,928 $ 418,752 $ 3,211,750 1,810,s56 $ 1,652,414 $ 1,263,575 $1,376,300 $ 1,2s6,031 $ 1,146,255 $ 1,046,058 $ 802,798 $ 477,406 Break Even Point Capital Budgeting Decision Criterias NPV (Sum of PV) 3,016,138 NPV NPV (Using Excel Function$ IRR Payback Perled 3,016,138 Cost of capital 29827428.86 Yearly Revenue 4401038.772 8.11% Labour Cost 1033961.228 9.42 Depreciaion Depreciation Calculation Inisal Cost Useful ufesean Changes Due To Recessions 92: $22,500,000 Decrease in anual rev 20 20% Salvage Value Annual Depreciation so $1,125,000 Decrease in cost 10% Ater tax cash fow fom Sale of Asset in Year X Inisal Cost 22,500,000 New Cost of Capital Accum. Depn Net Book Value Sales Proceeds Taxable (Gain on Sale) 22,500,000 10% S50.000 50.000 Tax 15,000 Net Cash Rew ( ProcoadsS 35,000 Operating Cash Flow: Revenue Cost 15 10 11 12 13 14 16 17 18 19 20 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 s 4,000,000 $ 4,000,000 $ 4,000,000 s 4,000,000 $ 4,000,000 $ 4,000,000$ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 * $ 4,000,000 4,000,000 $ 4,000,000 S 4,000,000 S $ 450,000 s 436,500 $ $ 391,500 $ 391,500 s 4,000,000 $4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $4,000,000 $4,000,000 S 423,000 $ 409,s00 $ 396,000 $ 382,500 $ 369,000 ass s00 s 342,000 $ 328 500 $ 31s,000 $ 301,500 $ 288,000 $ 391,500 $ 391,5c0 $ 391,500 s 391,500 $ 391,500 $ 391,500 s 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 $ 391,500 s Gross Profit Marketing Labour Environment Test 4,000,000 274,500 $ 261,000 $ 247,500 $ 234,000$ 220,500 s 207,000 s 342,000 $ 328,500 $ 193,500 391,500 562 500 s $62,500 45,000 $ 45,000 $ 45,000 s 45,000 s $ 562,500 $ $62,500 $ 45,000 $ 45,000 S 45,000 s 45,000 $ 45,000 s 45,000 $ 45,000 $ 45,000 s 45,000 s 45,000 $ 45,000 s Ovehead 45,000 $ 180,000 s $ 2,933,500 S 2,947,000 $ 2,960,500 $ 2,974,000 $ 2,425,000 $ 3,001,000 $ 3,014,500 $ 3,028,000 $ 3,041,500 $2,492,500 $ 3,068,500 $ 3,082,000 $ 3,095,500 $ 3,109,000 $2,560,000 45,000 $ 45,000 $ 45,000 s 45,000 $ 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s 180,000 s $ 180,000 s 180.000 s 180,000 s r* r S $1,125.000 $1,125.000 $1,125,000 $1,125.000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 S1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1125,000 * S $ 180,000 s 180,000 s 180,00 s 180,000 s 180,000 s 180,00 180.000 s 1a0.000 s 180,000 $ 180,000 $ 180,000 $ Parking Cost EBITDA 180,000 0 r $3,149,500 2,627,500 Depreciation & Amorisation $1,125.000 $1.125,000 $1,125.000 1,835,500 $ 1,849,000 $ 1,300,000 $1,876,000 $ 1,889,500 $ 1,903,000 S 1,916,500 $ 1,367,500 $ 1,943,500 $ 1,957,000 $ 1,970,500 $ 1,984,000$1,435,000 550,650 s s54,700 s 390,000 s 562,800 s s66,850 s r $2,024,500 $1,808,500 S 1,822,000 S s 542,sso s $ 1,265,950 S 1,275,400 S 1,502,500 s 574,950 s 410,250 s 587,100 s s91,150 s 595,200 $ 430,50 s 603,300 s 607,350 s 611,400 $ 615,450 s r S Tax 546,600 s 566 850 s 570.900 's sa3.050 's 450,750 910,000 $1,313,200 $ 1,322,650 $ 1,332,100 S 1,341,550 S 957,250 $ 1,360,450 $ 1,369,900 $ 1,379,350 $ 1,388,800 $1,004,500 er * Net lncome 1,284,850 $ 1,294,300 S $1,417,150 S 1,051,750 $1,125.000 S1,125.000 $1.125.000 $1,125.co0 $1.125.00o 51,125.000 S1,125.000 S1,125.000 Acd back depn $1,125,000 1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,12s,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $2,409,850 $2,419,300 $2,035,000 $2,438,200 $2,447,650 $2,457,100 $2,466,550 $2.082,250 $2,485,450 $2,4594,900 $2,504,350 $2,513,800 $2,129,500 $2,532,700 $2,542,150 $2,551,600 $2,561,050 Operading Cash Flow $2,390,950 $2,400,400 $2,176,750 Project Cash Flows Capital Spending Change in Working CapitalS Net Cash lew Present Value 19 4. 10 11 12 13 14 15 16 17 18 22,500.000 35,000 $ 1,000,000 1,000,000 23,500,000 $ 2,390,950 $ 2,400,400 $ 2409,850 $ 2,419,300 $ 2,035,000 $ 2,438,200 $ 2,447,650 $ 2,457,100 $ 2,466,550 S 2,082,250 S 2,485,450 $ 2,494,900 $ 2,504,350 $ 2,513,800 $ 2,129,500 E $2,542,150 661,962 $ so9,78s $ s1,189 $ s02,951 $ 458,928 $ 418,752 $ 3,211,750 1,810,s56 $ 1,652,414 $ 1,263,575 $1,376,300 $ 1,2s6,031 $ 1,146,255 $ 1,046,058 $ 802,798 $ 477,406 Break Even Point Capital Budgeting Decision Criterias NPV (Sum of PV) 3,016,138 NPV NPV (Using Excel Function$ IRR Payback Perled 3,016,138 Cost of capital 29827428.86 Yearly Revenue 4401038.772 8.11% Labour Cost 1033961.228 9.42