Chapter 11 Mini Case

Cash Flow Estimation

Situation

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducte
Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves' main plant. The machinery
would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000
equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipmen
MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first
depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due
Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues
rate is 40%, and its overall weighted average cost of capital is 10%.

a. Define “incremental cash flow.”

(1.) Should you subtract interest expense or dividends when calculating project cash flow?

(2.) Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should this be
included in the analysis? Explain.

(3.) Now assume that the plant space could be leased out to another firm at $25,000 per year. Should this be
included in the analysis? If so, how?

(4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by
$50,000 per year. Should this be considered in the analysis? If so, how?

Analysis of New Expansion Project

Part I: Input Data

Equipment cost $8,000,000 Key Output: NPV =

Shipping charge $0
Installation charge $0
Economic Life 4
Salvage Value $2,000,000
Tax Rate 40%
Cost of Capital 50%
Units Sold 20,000
Sales Price Per Unit $2,000
Incremental Cost Per Unit
NWC/Sales 12%
Inflation rate 5%
b. Disregard the assumptions in Part a. What is Shrieves' depreciable basis? What are the annual
depreciation expenses?

Annual Depreciation Expense

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $8,000,000

Year % x Basis = Depr.

1 0.2 $8,000,000 $1,600,000
2 0.32 8,000,000 2,560,000
3 0.192 8,000,000 1,536,000
4 0.1152 8,000,000 921,600

c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include
inflation when estimating cash flows?

d. Construct annual incremental operating cash flow statements.

Annual Operating Cash Flows

Year 1 Year 2 Year 3
Units 20,000 20,000 20,000
Unit price $2,000.00 $2,100.00 $2,205.00
Unit cost $0.00 $0.00 $0.00

Sales $40,000,000 $42,000,000 $44,100,000

Costs 0 0 0
Depreciation 1,600,000 2,560,000 1,536,000
Operating income before taxes (EBIT) $38,400,000 $39,440,000 $42,564,000
Taxes (40%) 15,360,000 15,776,000 17,025,600
EBIT (1 – T) $23,040,000 $23,664,000 $25,538,400
Depreciation 1,600,000 2,560,000 1,536,000
Net operating CF $24,640,000 $26,224,000 $27,074,400

e. Estimate the required net working capital for each year, and the cash flow due to investments in net working
capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0 Year 1 Year 2 Year 3

Sales $40,000,000 $42,000,000 $44,100,000
NWC (% of sales) 4,800,000 5,040,000 5,292,000 5,556,600
CF due to investment in NOWC) (4,800,000) (240,000) (252,000) (264,600)
f. Calculate the after-tax salvage cash flow.
Hypothetical: If sold after
After-tax Salvage Value 3 years for
Based on
facts in case:
Salvage value $2,000,000
Book value 1,382,400
Gain or loss $617,600
Tax on salvage value 247,040
Net terminal cash flow $1,752,960

g. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR,
MIRR, and payback? Do these indicators suggest the project should be undertaken?

Projected Net Cash Flows

Year 0 Year 1 Year 2

Investment Outlay: Long Term Assets ($8,000,000)

Operating Cash Flows $24,640,000 $26,224,000
CF due to investment in NWC (4,800,000) (240,000) (252,000)
Salvage Cash Flows
Net Cash Flows ($12,800,000) $24,400,000 $25,972,000

NPV $29,958,104
IRR 194.5% PV of Inflows TV of Inflows
$42,758,104 $62,602,140
Years
Find MIRR 0 1 2
Net Cash Flows ($12,800,000) $24,400,000 $25,972,000

PV= ($12,800,000)

To find MIRR, we could now find the discount rate that equates the PV and TV. But it is easier to use the MIRR function.
MIRR = 102.8%

Find Payback Years

0 1 2
Cash Flow ($12,800,000) $24,400,000 $25,972,000
Cumulative Cash Flow for Payback ($12,800,000) $11,600,000 $37,572,000

Payback = 0.5
h. What does the term ”risk” mean in the context of capital budgeting; to what extent can risk be quantified; and
when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on
subjective, judgmental estimates?

Risk in capital budgeting really means the probability that the actual outcome will be worse than the expected outcome. For examp
a high probability that the expected NPV as calculated above will actually turn out to be negative, then the project would be classifi
risky. The reason for a worse-than-expected outcome is, typically, because sales were lower than expected, costs were higher than e
the project turned out to have a higher than expected initial cost. In other words, if the assumed inputs turn out to be worse than ex
the output will likewise be worse than expected. We use Excel to examine the project's sensitivity to changes in the input variables.

i. (1.) What are the three types of risk that are relevant in capital budgeting?

(2.) How is each of these risk types measured, and how do they relate to one another?

(3.) How is each type of risk used in the capital budgeting process?

Evaluating Risk: Sensitivity Analysis

Sensitivity of NPV and to Variations in Input Variables

j. (1.) What is sensitivity analysis?

(2.) Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume
that each of these variables can vary from its base-case, or expected, value by plus and minus 10%, 20%, and
30%. Include a sensitivity diagram, and discuss the results.

Here we use an Excel "Data Table" to find the NPVs for changes in unit sales, salvage value, and WACC holding other things const
one variable at a time. This produces the sensitivity analys as shown below.

We summarize the data tables and show the sensitivity analysis graph below:

% Deviation WACC % Deviation 1st YEAR UNIT SALES % Deviation

from NPV from Units NPV from
Base Case WACC 29,958,104 Base Case Sold $29,958,104 Base Case
-30% $99,843,000 -30% -$6,517,096 -30%
-15% 99,843,000 -15% -6,517,096 -15%
0% 99,843,000 0% -6,517,096 0%
15% 99,843,000 15% -6,517,096 15%
30% 99,843,000 30% -6,517,096 30%
Evaluating Risk: Sensitivity Analysis

Sensitivity Analysis
NPV ($)

120,000,000
Units Sold
100,000,000
80,000,000
Salvage Value
60,000,000
40,000,000
20,000,000 WACC
0
-40% -30% -20% -10% 0% 10% 20% 30% 40%
-20,000,000

Deviation from Base-Case Value

Deviation NPV Deviation from Base Case

from Units
Base Case WACC Sold Salvage
-30% $99,843,000 ($6,517,096) $29,721,067
-15% 99,843,000 (6,517,096) 29,721,067
0% 99,843,000 (6,517,096) 29,721,067
15% 99,843,000 (6,517,096) 29,721,067
30% 99,843,000 (6,517,096) 29,721,067

Range $0 $13,034,193 $0

(3.) What is the primary weakness of sensitivity analysis? What is its primary usefulness?

k. Assume that Sidney Johnson is confident of her estimates of all the variables that affect the project’s cash flows
except unit sales and sales price: If product acceptance is poor, unit sales would be only 900 units a year and the
unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of
$240. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and
a 50% chance of average acceptance (the base case).

(1.) What is scenario analysis?

Scenario analysis extends risk analysis in two ways: (1) It allows us to change more than one variable at a time, hence to see the com
changes in several variables on NPV, and (2) it allows us to bring in the probabilities of changes in the key variables.

(2.) What is the worst-case NPV? The best-case NPV?

(3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.
 (3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.

Evaluating Risk: Scenario Analysis

We could find the NPV by entering the value of unit sales and price for each scenario and then recording the NPV (this is what we d
below). Alternatively, we could use Tools, Scenarios to define the inputs for each scenario, which we did and show in the Scenario S
below. In fact, you could even use Tools, Scenarios, and then click the Summary button on the dialog box, and it will automatically
similar to the one below. This is a powerful feature of Excel, and we encourage you to explore it.

Scenario Analysis
Squared Deviation
Scenario Probability Unit Sales Unit Price NPV times Probability

Best Case 25%

Base Case 50%
Worst Case 25%
Quick calculation:
Expected NPV = $0 $0
Standard Deviation = $0 $0
Coefficient of Variation = Std Dev / Expected NPV = #DIV/0!

l. Are there problems with scenario analysis? Define simulation analysis, and discuss its principal advantages and
disadvantages.

Monte Carlo Simulation

Monte Carlo simulation is similar to scenario analysis in that different values of key input variables are used. Unlike scenario analy
Carlo simulation draws the input values from specified probability distributions and then computes the NPV. It repeats this proces
even thousands, of times. It then averages the NPVs from each repetition.

Risk Adjusted Cost of Capital

m. (1.) Assume that Shrieves' average project has a coefficient of variation in the range of 0.2 to 0.4. Would the
new line be classified as high risk, average risk, or low risk? What type of risk is being measured here?

(2.) Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk.
Should the new line be accepted?

The CV of this project is 1.15, which is larger than the CV range of the firm's average project. Consequently, this project is riskier
average project, so management should add 3% to the WACC to risk adjust.
Cost of capital for average projects: 50%
Adjustment for risky projects:
Risk adjusted cost of capital:

NPV with risk-adjusted cost of capital: $99,843,000

 (3.) Are there any subjective risk factors that should be considered before the final decision is made?

m. What is a real option? What are some types of real options?

 1/1/2012

capital budgeting analysis is being conducted by Sidney

ace in Shrieves' main plant. The machinery’s invoice price
ed, and it would cost an additional $30,000 to install the
a special tax ruling that places the equipment in the
er 4 years of use.

ncremental cost of $100 per unit in the first year, excluding

are expected to increase by 3% per year due to inflation.
y an amount equal to 12% of sales revenues. The firm’s tax

flow?

site. Should this be

er year. Should this be

’s other lines by

$29,958,104
 e the annual

Remaining Book Value

$6,400,000
3,840,000
2,304,000
1,382,400

mportant to include

Year 4
20,000
$2,315.25
$0.00

$46,305,000
0
921,600
$45,383,400
18,153,360
$27,230,040
921,600
$28,151,640

estments in net working

Year 4
$46,305,000

5,556,600
roject’s NPV, IRR,
?

Year 3 Year 4

$27,074,400 $28,151,640
(264,600) 5,556,600
1,752,960
$26,809,800 $35,461,200

Years
3 4
$26,809,800 $35,461,200
40,214,700
58,437,000
82,350,000
TV = $216,462,900

is easier to use the MIRR function.

Years
3 4
$26,809,800 $35,461,200
$64,381,800 $99,843,000
an risk be quantified; and
f historical data or on

orse than the expected outcome. For example, if there were

e negative, then the project would be classified as relatively
wer than expected, costs were higher than expected, and/or
assumed inputs turn out to be worse than expected then
sensitivity to changes in the input variables.

for the project. Assume

us and minus 10%, 20%, and

alue, and WACC holding other things constant--changing

SALVAGE
Variable NPV
Cost $29,958,104
$29,721,067
29,721,067
29,721,067
29,721,067
29,721,067
 Value

0% 40%

lue

ness?

ect the project’s cash flows

only 900 units a year and the
,600 units and a unit price of
of excellent acceptance, and

n one variable at a time, hence to see the combined effects of

changes in the key variables.

o find the project’s expected

nd then recording the NPV (this is what we did for the table
rio, which we did and show in the Scenario Summary Tab
n on the dialog box, and it will automatically create a table
xplore it.

Squared Deviation
times Probability

Quick calculation:

s principal advantages and

ut variables are used. Unlike scenario analysis, Monte

en computes the NPV. It repeats this process hundreds, or

e of 0.2 to 0.4. Would the

k is being measured here?

pital to adjust for risk.

roject. Consequently, this project is riskier than the firm's

ecision is made?
 Chapter 11 Mini Case
Cash Flow Estimation
Situation

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducte
Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves' main plant. The machinery
would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000
equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipmen
MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first
depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due
Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues
rate is 40%, and its overall weighted average cost of capital is 10%.

a. Define “incremental cash flow.”

(1.) Should you subtract interest expense or dividends when calculating project cash flow?

(2.) Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should this be
included in the analysis? Explain.

(3.) Now assume that the plant space could be leased out to another firm at $25,000 per year. Should this be
included in the analysis? If so, how?

(4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by
$50,000 per year. Should this be considered in the analysis? If so, how?

Analysis of New Expansion Project

Part I: Input Data

Equipment cost $12,000,000 Key Output: NPV =

Shipping charge $0
Installation charge $0
Economic Life 4
Salvage Value $7,500,000
Tax Rate 40%
Cost of Capital 50%
Units Sold 20,000
Sales Price Per Unit $2,000
Incremental Cost Per Unit
NWC/Sales 12%
Inflation rate 5%
b. Disregard the assumptions in Part a. What is Shrieves' depreciable basis? What are the annual
depreciation expenses?

Annual Depreciation Expense

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $12,000,000

Year % x Basis = Depr.

1 0.2 $12,000,000 $2,400,000
2 0.32 12,000,000 3,840,000
3 0.192 12,000,000 2,304,000
4 0.1152 12,000,000 1,382,400

c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include
inflation when estimating cash flows?

d. Construct annual incremental operating cash flow statements.

Annual Operating Cash Flows

Year 1 Year 2 Year 3
Units 20,000 20,000 20,000
Unit price $2,000.00 $2,100.00 $2,205.00
Unit cost $0.00 $0.00 $0.00

Sales $40,000,000 $42,000,000 $44,100,000

Costs 0 0 0
Depreciation 2,400,000 3,840,000 2,304,000
Operating income before taxes (EBIT) $37,600,000 $38,160,000 $41,796,000
Taxes (40%) 15,040,000 15,264,000 16,718,400
EBIT (1 – T) $22,560,000 $22,896,000 $25,077,600
Depreciation 2,400,000 3,840,000 2,304,000
Net operating CF $24,960,000 $26,736,000 $27,381,600

e. Estimate the required net working capital for each year, and the cash flow due to investments in net working
capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0 Year 1 Year 2 Year 3

Sales $40,000,000 $42,000,000 $44,100,000
NWC (% of sales) 4,800,000 5,040,000 5,292,000 5,556,600
CF due to investment in NOWC) (4,800,000) (240,000) (252,000) (264,600)
f. Calculate the after-tax salvage cash flow.
Hypothetical: If sold after
After-tax Salvage Value 3 years for
Based on
facts in case:
Salvage value $7,500,000
Book value 2,073,600
Gain or loss $5,426,400
Tax on salvage value 2,170,560
Net terminal cash flow $5,329,440

g. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR,
MIRR, and payback? Do these indicators suggest the project should be undertaken?

Projected Net Cash Flows

Year 0 Year 1 Year 2

Investment Outlay: Long Term Assets ($12,000,000)

Operating Cash Flows $24,960,000 $26,736,000
CF due to investment in NWC (4,800,000) (240,000) (252,000)
Salvage Cash Flows
Net Cash Flows ($16,800,000) $24,720,000 $26,484,000

NPV $27,232,889
IRR 150.6% PV of Inflows TV of Inflows
$44,032,889 $64,468,553
Years
Find MIRR 0 1 2
Net Cash Flows ($16,800,000) $24,720,000 $26,484,000

PV= ($16,800,000)

To find MIRR, we could now find the discount rate that equates the PV and TV. But it is easier to use the MIRR function.
MIRR = 90.9%

Find Payback Years

0 1 2
Cash Flow ($16,800,000) $24,720,000 $26,484,000
Cumulative Cash Flow for Payback ($16,800,000) $7,920,000 $34,404,000

Payback = 0.7
h. What does the term ”risk” mean in the context of capital budgeting; to what extent can risk be quantified; and
when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on
subjective, judgmental estimates?

Risk in capital budgeting really means the probability that the actual outcome will be worse than the expected outcome. For examp
a high probability that the expected NPV as calculated above will actually turn out to be negative, then the project would be classifi
risky. The reason for a worse-than-expected outcome is, typically, because sales were lower than expected, costs were higher than e
the project turned out to have a higher than expected initial cost. In other words, if the assumed inputs turn out to be worse than ex
the output will likewise be worse than expected. We use Excel to examine the project's sensitivity to changes in the input variables.

i. (1.) What are the three types of risk that are relevant in capital budgeting?

(2.) How is each of these risk types measured, and how do they relate to one another?

(3.) How is each type of risk used in the capital budgeting process?

Evaluating Risk: Sensitivity Analysis

Sensitivity of NPV and to Variations in Input Variables

j. (1.) What is sensitivity analysis?

(2.) Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume
that each of these variables can vary from its base-case, or expected, value by plus and minus 10%, 20%, and
30%. Include a sensitivity diagram, and discuss the results.

Here we use an Excel "Data Table" to find the NPVs for changes in unit sales, salvage value, and WACC holding other things const
one variable at a time. This produces the sensitivity analys as shown below.

We summarize the data tables and show the sensitivity analysis graph below:

% Deviation WACC % Deviation 1st YEAR UNIT SALES % Deviation

from NPV from Units NPV from
Base Case WACC 27,232,889 Base Case Sold $27,232,889 Base Case
-30% $100,743,000 -30% -$9,242,311 -30%
-15% 100,743,000 -15% -9,242,311 -15%
0% 100,743,000 0% -9,242,311 0%
15% 100,743,000 15% -9,242,311 15%
30% 100,743,000 30% -9,242,311 30%
Evaluating Risk: Sensitivity Analysis

Sensitivity Analysis
NPV ($)

120,000,000
Units Sold
100,000,000
80,000,000
Salvage Value
60,000,000
40,000,000
20,000,000 WACC
0
-40% -30% -20% -10% 0% 10% 20% 30% 40%
-20,000,000

Deviation from Base-Case Value

Deviation NPV Deviation from Base Case

from Units
Base Case WACC Sold Salvage
-30% ### ($9,242,311) $26,344,000
-15% 100,743,000 (9,242,311) 26,344,000
0% 100,743,000 (9,242,311) 26,344,000
15% 100,743,000 (9,242,311) 26,344,000
30% 100,743,000 (9,242,311) 26,344,000

Range $0 $18,484,622 $0

(3.) What is the primary weakness of sensitivity analysis? What is its primary usefulness?

k. Assume that Sidney Johnson is confident of her estimates of all the variables that affect the project’s cash flows
except unit sales and sales price: If product acceptance is poor, unit sales would be only 900 units a year and the
unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of
$240. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and
a 50% chance of average acceptance (the base case).

(1.) What is scenario analysis?

Scenario analysis extends risk analysis in two ways: (1) It allows us to change more than one variable at a time, hence to see the com
changes in several variables on NPV, and (2) it allows us to bring in the probabilities of changes in the key variables.

(2.) What is the worst-case NPV? The best-case NPV?

(3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.
 (3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.

Evaluating Risk: Scenario Analysis

We could find the NPV by entering the value of unit sales and price for each scenario and then recording the NPV (this is what we d
below). Alternatively, we could use Tools, Scenarios to define the inputs for each scenario, which we did and show in the Scenario S
below. In fact, you could even use Tools, Scenarios, and then click the Summary button on the dialog box, and it will automatically
similar to the one below. This is a powerful feature of Excel, and we encourage you to explore it.

Scenario Analysis
Squared Deviation
Scenario Probability Unit Sales Unit Price NPV times Probability

Best Case 25%

Base Case 50%
Worst Case 25%
Quick calculation:
Expected NPV = $0 $0
Standard Deviation = $0 $0
Coefficient of Variation = Std Dev / Expected NPV = #DIV/0!

l. Are there problems with scenario analysis? Define simulation analysis, and discuss its principal advantages and
disadvantages.

Monte Carlo Simulation

Monte Carlo simulation is similar to scenario analysis in that different values of key input variables are used. Unlike scenario analy
Carlo simulation draws the input values from specified probability distributions and then computes the NPV. It repeats this proces
even thousands, of times. It then averages the NPVs from each repetition.

Risk Adjusted Cost of Capital

m. (1.) Assume that Shrieves' average project has a coefficient of variation in the range of 0.2 to 0.4. Would the
new line be classified as high risk, average risk, or low risk? What type of risk is being measured here?

(2.) Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk.
Should the new line be accepted?

The CV of this project is 1.15, which is larger than the CV range of the firm's average project. Consequently, this project is riskier
average project, so management should add 3% to the WACC to risk adjust.
Cost of capital for average projects: 50%
Adjustment for risky projects:
Risk adjusted cost of capital:

NPV with risk-adjusted cost of capital: ###

 (3.) Are there any subjective risk factors that should be considered before the final decision is made?

m. What is a real option? What are some types of real options?

 1/1/2012

capital budgeting analysis is being conducted by Sidney

ace in Shrieves' main plant. The machinery’s invoice price
ed, and it would cost an additional $30,000 to install the
a special tax ruling that places the equipment in the
er 4 years of use.

ncremental cost of $100 per unit in the first year, excluding

are expected to increase by 3% per year due to inflation.
y an amount equal to 12% of sales revenues. The firm’s tax

flow?

site. Should this be

er year. Should this be

’s other lines by

$27,232,889
 e the annual

Remaining Book Value

$9,600,000
5,760,000
3,456,000
2,073,600

mportant to include

Year 4
20,000
$2,315.25
$0.00

$46,305,000
0
1,382,400
$44,922,600
17,969,040
$26,953,560
1,382,400
$28,335,960

estments in net working

Year 4
$46,305,000

5,556,600
roject’s NPV, IRR,
?

Year 3 Year 4

$27,381,600 $28,335,960
(264,600) 5,556,600
5,329,440
$27,117,000 $39,222,000

Years
3 4
$27,117,000 $39,222,000
40,675,500
59,589,000
83,430,000
TV = $222,916,500

is easier to use the MIRR function.

Years
3 4
$27,117,000 $39,222,000
$61,521,000 $100,743,000
an risk be quantified; and
f historical data or on

orse than the expected outcome. For example, if there were

e negative, then the project would be classified as relatively
wer than expected, costs were higher than expected, and/or
assumed inputs turn out to be worse than expected then
sensitivity to changes in the input variables.

for the project. Assume

us and minus 10%, 20%, and

alue, and WACC holding other things constant--changing

SALVAGE
Variable NPV
Cost $27,232,889
$26,344,000
26,344,000
26,344,000
26,344,000
26,344,000
 Value

0% 40%

lue

ness?

ect the project’s cash flows

only 900 units a year and the
,600 units and a unit price of
of excellent acceptance, and

n one variable at a time, hence to see the combined effects of

changes in the key variables.

o find the project’s expected

nd then recording the NPV (this is what we did for the table
rio, which we did and show in the Scenario Summary Tab
n on the dialog box, and it will automatically create a table
xplore it.

Squared Deviation
times Probability

Quick calculation:

s principal advantages and

ut variables are used. Unlike scenario analysis, Monte

en computes the NPV. It repeats this process hundreds, or

e of 0.2 to 0.4. Would the

k is being measured here?

pital to adjust for risk.

roject. Consequently, this project is riskier than the firm's

ecision is made?
$200,000
$10,000
$30,000
4
$25,000
40%
10%
1,250
$200
$100
12%
3%
$200,000
$10,000
$30,000
4
$25,000
40%
10%
1,600
$240
$100
12%
3%
$200,000
$10,000
$30,000
4
$25,000
40%
10%
900
$160
$100
12%
3%
$200,000
$10,000
$30,000
4
$25,000
40%
10%
1,250
$200
$100
12%
0%
 Chapter 11 Mini Case
Cash Flow Estimation
Situation

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducte
Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves' main plant. The machinery
would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000
equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipmen
MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use.

The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first
depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due
Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues
rate is 40%, and its overall weighted average cost of capital is 10%.

a. Define “incremental cash flow.”

(1.) Should you subtract interest expense or dividends when calculating project cash flow?

(2.) Suppose the firm had spent $100,000 last year to rehabilitate the production line site. Should this be
included in the analysis? Explain.

(3.) Now assume that the plant space could be leased out to another firm at $25,000 per year. Should this be
included in the analysis? If so, how?

(4.) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by
$50,000 per year. Should this be considered in the analysis? If so, how?

Analysis of New Expansion Project

Part I: Input Data

Equipment cost $7,500 Key Output: NPV =

Shipping charge $0
Installation charge $0
Economic Life 4
Salvage Value $7,500,000
Tax Rate 40%
Cost of Capital 50%
Units Sold 20,000
Sales Price Per Unit $2,000
Incremental Cost Per Unit
NWC/Sales 12%
Inflation rate 5%
b. Disregard the assumptions in Part a. What is Shrieves' depreciable basis? What are the annual
depreciation expenses?

Annual Depreciation Expense

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $7,500

Year % x Basis = Depr.

1 0.2 $7,500 $1,500
2 0.32 7,500 2,400
3 0.192 7,500 1,440
4 0.1152 7,500 864

c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include
inflation when estimating cash flows?

d. Construct annual incremental operating cash flow statements.

Annual Operating Cash Flows

Year 1 Year 2 Year 3
Units 20,000 20,000 20,000
Unit price $2,000.00 $2,100.00 $2,205.00
Unit cost $0.00 $0.00 $0.00

Sales $40,000,000 $42,000,000 $44,100,000

Costs 0 0 0
Depreciation 1,500 2,400 1,440
Operating income before taxes (EBIT) $39,998,500 $41,997,600 $44,098,560
Taxes (40%) 15,999,400 16,799,040 17,639,424
EBIT (1 – T) $23,999,100 $25,198,560 $26,459,136
Depreciation 1,500 2,400 1,440
Net operating CF $24,000,600 $25,200,960 $26,460,576

e. Estimate the required net working capital for each year, and the cash flow due to investments in net working
capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0 Year 1 Year 2 Year 3

Sales $40,000,000 $42,000,000 $44,100,000
NWC (% of sales) 4,800,000 5,040,000 5,292,000 5,556,600
CF due to investment in NOWC) (4,800,000) (240,000) (252,000) (264,600)
f. Calculate the after-tax salvage cash flow.
Hypothetical: If sold after
After-tax Salvage Value 3 years for
Based on
facts in case:
Salvage value $7,500,000
Book value 1,296
Gain or loss $7,498,704
Tax on salvage value 2,999,482
Net terminal cash flow $4,500,518

g. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR,
MIRR, and payback? Do these indicators suggest the project should be undertaken?

Projected Net Cash Flows

Year 0 Year 1 Year 2

Investment Outlay: Long Term Assets ($7,500)

Operating Cash Flows $24,000,600 $25,200,960
CF due to investment in NWC (4,800,000) (240,000) (252,000)
Salvage Cash Flows
Net Cash Flows ($4,807,500) $23,760,600 $24,948,960

NPV $37,357,757
IRR 499.6% PV of Inflows TV of Inflows
$42,165,257 $61,734,153
Years
Find MIRR 0 1 2
Net Cash Flows ($4,807,500) $23,760,600 $24,948,960

PV= ($4,807,500)

To find MIRR, we could now find the discount rate that equates the PV and TV. But it is easier to use the MIRR function.
MIRR = 158.1%

Find Payback Years

0 1 2
Cash Flow ($4,807,500) $23,760,600 $24,948,960
Cumulative Cash Flow for Payback ($4,807,500) $18,953,100 $43,902,060

Payback = 0.2
h. What does the term ”risk” mean in the context of capital budgeting; to what extent can risk be quantified; and
when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on
subjective, judgmental estimates?

Risk in capital budgeting really means the probability that the actual outcome will be worse than the expected outcome. For examp
a high probability that the expected NPV as calculated above will actually turn out to be negative, then the project would be classifi
risky. The reason for a worse-than-expected outcome is, typically, because sales were lower than expected, costs were higher than e
the project turned out to have a higher than expected initial cost. In other words, if the assumed inputs turn out to be worse than ex
the output will likewise be worse than expected. We use Excel to examine the project's sensitivity to changes in the input variables.

i. (1.) What are the three types of risk that are relevant in capital budgeting?

(2.) How is each of these risk types measured, and how do they relate to one another?

(3.) How is each type of risk used in the capital budgeting process?

Evaluating Risk: Sensitivity Analysis

Sensitivity of NPV and to Variations in Input Variables

j. (1.) What is sensitivity analysis?

(2.) Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume
that each of these variables can vary from its base-case, or expected, value by plus and minus 10%, 20%, and
30%. Include a sensitivity diagram, and discuss the results.

Here we use an Excel "Data Table" to find the NPVs for changes in unit sales, salvage value, and WACC holding other things const
one variable at a time. This produces the sensitivity analys as shown below.

We summarize the data tables and show the sensitivity analysis graph below:

% Deviation WACC % Deviation 1st YEAR UNIT SALES % Deviation

from NPV from Units NPV from
Base Case WACC 37,357,757 Base Case Sold $37,357,757 Base Case
-30% $107,938,500 -30% $882,557 -30%
-15% 107,938,500 -15% 882,557 -15%
0% 107,938,500 0% 882,557 0%
15% 107,938,500 15% 882,557 15%
30% 107,938,500 30% 882,557 30%
Evaluating Risk: Sensitivity Analysis

Sensitivity Analysis
NPV ($)

120,000,000
Units Sold
100,000,000

80,000,000
Salvage Value
60,000,000

40,000,000
WACC
20,000,000

0
-40% -30% -20% -10% 0% 10% 20% 30% 40%
Deviation from Base-Case Value

Deviation NPV Deviation from Base Case

from Units
Base Case WACC Sold Salvage
-30% ### $882,557 $36,468,868
-15% 107,938,500 882,557 36,468,868
0% 107,938,500 882,557 36,468,868
15% 107,938,500 882,557 36,468,868
30% 107,938,500 882,557 36,468,868

Range $0 $1,765,114 $0

(3.) What is the primary weakness of sensitivity analysis? What is its primary usefulness?

k. Assume that Sidney Johnson is confident of her estimates of all the variables that affect the project’s cash flows
except unit sales and sales price: If product acceptance is poor, unit sales would be only 900 units a year and the
unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of
$240. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and
a 50% chance of average acceptance (the base case).

(1.) What is scenario analysis?

Scenario analysis extends risk analysis in two ways: (1) It allows us to change more than one variable at a time, hence to see the com
changes in several variables on NPV, and (2) it allows us to bring in the probabilities of changes in the key variables.

(2.) What is the worst-case NPV? The best-case NPV?

(3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.
 (3.) Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the project’s expected
NPV, standard deviation, and coefficient of variation.

Evaluating Risk: Scenario Analysis

We could find the NPV by entering the value of unit sales and price for each scenario and then recording the NPV (this is what we d
below). Alternatively, we could use Tools, Scenarios to define the inputs for each scenario, which we did and show in the Scenario S
below. In fact, you could even use Tools, Scenarios, and then click the Summary button on the dialog box, and it will automatically
similar to the one below. This is a powerful feature of Excel, and we encourage you to explore it.

Scenario Analysis
Squared Deviation
Scenario Probability Unit Sales Unit Price NPV times Probability

Best Case 25%

Base Case 50%
Worst Case 25%
Quick calculation:
Expected NPV = $0 $0
Standard Deviation = $0 $0
Coefficient of Variation = Std Dev / Expected NPV = #DIV/0!

l. Are there problems with scenario analysis? Define simulation analysis, and discuss its principal advantages and
disadvantages.

Monte Carlo Simulation

Monte Carlo simulation is similar to scenario analysis in that different values of key input variables are used. Unlike scenario analy
Carlo simulation draws the input values from specified probability distributions and then computes the NPV. It repeats this proces
even thousands, of times. It then averages the NPVs from each repetition.

Risk Adjusted Cost of Capital

m. (1.) Assume that Shrieves' average project has a coefficient of variation in the range of 0.2 to 0.4. Would the
new line be classified as high risk, average risk, or low risk? What type of risk is being measured here?

(2.) Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk.
Should the new line be accepted?

The CV of this project is 1.15, which is larger than the CV range of the firm's average project. Consequently, this project is riskier
average project, so management should add 3% to the WACC to risk adjust.
Cost of capital for average projects: 50%
Adjustment for risky projects:
Risk adjusted cost of capital:

NPV with risk-adjusted cost of capital: ###

 (3.) Are there any subjective risk factors that should be considered before the final decision is made?

m. What is a real option? What are some types of real options?

 1/1/2012

capital budgeting analysis is being conducted by Sidney

ace in Shrieves' main plant. The machinery’s invoice price
ed, and it would cost an additional $30,000 to install the
a special tax ruling that places the equipment in the
er 4 years of use.

ncremental cost of $100 per unit in the first year, excluding

are expected to increase by 3% per year due to inflation.
y an amount equal to 12% of sales revenues. The firm’s tax

flow?

site. Should this be

er year. Should this be

’s other lines by

$37,357,757
 e the annual

Remaining Book Value

$6,000
3,600
2,160
1,296

mportant to include

Year 4
20,000
$2,315.25
$0.00

$46,305,000
0
864
$46,304,136
18,521,654
$27,782,482
864
$27,783,346

estments in net working

Year 4
$46,305,000

5,556,600
roject’s NPV, IRR,
?

Year 3 Year 4

$26,460,576 $27,783,346
(264,600) 5,556,600
4,500,518
$26,195,976 $37,840,464

Years
3 4
$26,195,976 $37,840,464
39,293,964
56,135,160
80,192,025
TV = $213,461,613

is easier to use the MIRR function.

Years
3 4
$26,195,976 $37,840,464
$70,098,036 $107,938,500
an risk be quantified; and
f historical data or on

orse than the expected outcome. For example, if there were

e negative, then the project would be classified as relatively
wer than expected, costs were higher than expected, and/or
assumed inputs turn out to be worse than expected then
sensitivity to changes in the input variables.

for the project. Assume

us and minus 10%, 20%, and

alue, and WACC holding other things constant--changing

SALVAGE
Variable NPV
Cost $37,357,757
$36,468,868
36,468,868
36,468,868
36,468,868
36,468,868
 Value

0% 40%
lue

ness?

ect the project’s cash flows

only 900 units a year and the
,600 units and a unit price of
of excellent acceptance, and

n one variable at a time, hence to see the combined effects of

changes in the key variables.

o find the project’s expected

nd then recording the NPV (this is what we did for the table
rio, which we did and show in the Scenario Summary Tab
n on the dialog box, and it will automatically create a table
xplore it.

Squared Deviation
times Probability

Quick calculation:

s principal advantages and

ut variables are used. Unlike scenario analysis, Monte

en computes the NPV. It repeats this process hundreds, or

e of 0.2 to 0.4. Would the

k is being measured here?

pital to adjust for risk.

roject. Consequently, this project is riskier than the firm's

ecision is made?
Scenario Summary
Current Values: Base Case Best Case
Changing Cells:
$D$36 $200,000 $200,000 $200,000
$D$37 $10,000 $10,000 $10,000
$D$38 $30,000 $30,000 $30,000
$D$39 4 4 4
$D$40 $25,000 $25,000 $25,000
$D$41 40% 40% 40%
$D$42 10% 10% 10%
$D$43 1,250 1,250 1,600
$D$44 $200 $200 $240
$D$45 $100 $100 $100
$D$46 12% 12% 12%
$D$47 3% 3% 3%
Result Cells:
$C$113 $88,030 $88,030 $278,965
$C$114 23.9% 23.9% 48.3%
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
Worst Case Base-but forget inflation

$200,000 $200,000
$10,000 $10,000
$30,000 $30,000
4 4
$25,000 $25,000
40% 40%
10% 10%
900 1,250
$160 $200
$100 $100
12% 12%
3% 0%

($48,514) $78,387
1.0% 22.7%
 Section 11.7 Scenario Analysis

Monte Carlo simulation is similar to scenario analysis in that different values of key inputs are used Unlike scenario
analysis, Monte Carlo simulation draws a trial set of input values from specified probability distributions and then
computes the NPV for this trial. This process is repeated for hundreds, or even thousands, of trials, with key results
(like NPV) saved from each trial. After running the number of desired trials, the NPVs from the trials can be averaged
estimate the project's expected NPV; the trial results can also be used to provide a histogram showing the project's
possible outcomes.

The green area below is the same project as in the mini case, but we have replaced the inputs fro units sold and sales
price with random variables drawn from normal distributions with the expected values and means shown next to the
inputs. Notice that each time the sheet makes a calculation, the values for unit sales, sales price, and NPV change (Hi
you can make the sheet calculate by hitting the F9 key).

Here is a tip for simulating a project analysis. If you have already done the analysis and it is in a different worksheet,
how many rows it takes. Delete the green area below and add enough rows so that there will be room for your previou
analysis. For example, this model was in the "Model" tab in the file Ch 11 Mini Case.xls, rows 33-132. We went into tha
file, selected Rows 32-135, copied them, and then pasted them into Rows 32-135 of this Worksheet. Because we paste
them into the same row numbers from which we copied them, all the formula references remained correct. We then
edited this worksheet.

Analysis of New Expansion Project

Part I: Input Data

Equipment cost $200,000 Key Output: NPV =

Shipping charge $10,000
Installation charge $30,000
Economic Life 4
Salvage Value $25,000
Tax Rate 40%
Expected
Cost of Capital 10% Value Std. Dev.
Units Sold Random variable = 1,281 1,250 200
Sales Price Per Unit Random variable = $176 $200 $30
Incremental Cost Per Unit $100
NWC/Sales 12%
Inflation rate 3%
b. Disregard the assumptions in Part a. What is Shrieves' depreciable basis? What are the annual
depreciation expenses?

Annual Depreciation Expense

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $240,000
 Year % x Basis = Depr.
1 0.33 $240,000 $79,200
2 0.45 240,000 108,000
3 0.15 240,000 36,000
4 0.07 240,000 16,800

c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include
inflation when estimating cash flows? See answer to part d.

d. Construct annual incremental operating cash flow statements.

Annual Operating Cash Flows

Year 1 Year 2 Year 3
Units 1,281 1,281 1,281
Unit price $175.67 $180.94 $186.37
Unit cost $100.00 $103.00 $106.09

Sales $225,046 $231,797 $238,753

Costs 128,107 131,950 135,909
Depreciation 79,200 108,000 36,000
Operating income before taxes (EBIT) $17,739 ($8,153) $66,844
Taxes (40%) 7,096 (3,261) 26,738
EBIT (1 – T) $10,643 ($4,892) $40,106
Depreciation 79,200 108,000 36,000
Net operating CF $89,843 $103,108 $76,106

e. Estimate the required net working capital for each year, and the cash flow due to investments in net working
capital.

Annual Cash Flows due to Investments in Net Working Capital

Year 0 Year 1 Year 2 Year 3

Sales $225,046 $231,797 $238,753
NWC (% of sales) 27,006 27,816 28,650 29,510
CF due to investment in NOWC) (27,006) (810) (834) (860)

f. Calculate the after-tax salvage cash flow. Hypothetical: If sold

After-tax Salvage Value after 3 years for
Based on facts
in case: $25,000 $10,000
Salvage value $25,000 $25,000 $10,000
Book value 0 16,800 16,800
Gain or loss $25,000 $8,200 ($6,800)
Tax on salvage value 10,000 3,280 (2,720)
Net terminal cash flow $15,000 $21,720 $12,720

g. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR,
MIRR, and payback? Do these indicators suggest the project should be undertaken?
Projected Net Cash Flows
Year 0 Year 1 Year 2

Investment Outlay: Long Term Assets ($240,000)

Operating Cash Flows $89,843 $103,108
CF due to investment in NWC (27,006) (810) (834)
Salvage Cash Flows
Net Cash Flows ($267,006) $89,033 $102,274

NPV $33,393
IRR 15.5% PV of InflowsTV of Inflows
$300,399 $439,815
Years
Find MIRR 0 1 2
Net Cash Flows ($267,006) $89,033 $102,274

PV= ($267,006)

To find MIRR, we could now find the discount rate that equates the PV and TV. But it is easier to use the MIRR function.
MIRR = 13.3%

Find Payback Years

0 1 2
Cash Flow ($267,006) $89,033 $102,274
Cumulative Cash Flow for Payback ($267,006) ($177,973) ($75,698)

Payback = 3.0

How the Simulation Works

We use a Data Table to perform the simulation (the Data Table is below, shaded bright yellow). When the Data Table is
updated, it will insert new random variables for each of the inputs we allow to change in Panel A above, run the analy
is Panel C above, and then save the NPV for each trial (we also save the input variables for each trial so that we can
verify that they are behaving as we expect). We set the first column of the Data Table (the variable to be changed in ea
row) to numbers from 1-100. We don't really use these numbers anywhere in the analyis, but if we tell the Data Table t
treat these as the Column inputs, Excel will recalculate all items in the Data Table, including the random inputs and th
resulting NPV. In other words, we "trick" Excel into doing a simulation. We tell Excel to insert each of the Column inpu
in the Data Table into the cell immediately below this box. This cell isn't linked to anything else, but each time Excel
updates a row of the Data Table, all the random values will be updated.

Column input cell to "trick" Excel into updating random variables in Data Table: 1
Excel normally updates all values in a Data Table each time any cell that is related to the Data Table changes. In our
case, we have random variables in the Data Table, so each time any cell in the worksheet makes a calculation, the Da
Table is updated. If the Data Table has many rows, updating it can take up to 20 or 30 seconds. With only 100 rows, it
updates very quickly. But if it bothers you, you can set the worksheet to do automatic calculation except for data tabl

You don't need to change anything in this section. It will be updated automatically if you do a simulation. The summ
of the simulation results and the histogram are based on the simulation trials n the Data Table below and are updated
automatically when you do a simulation. You can do an updated simulation by hitting the F9 key.

Figure 11-27 Summary of Simulation Results (Thousands of Dollars)

Number of Trials = 100

Simulated Input Variables and Key Results

Sales Key Results:

Price Per
Units Sold Unit NPV
Mean $1,281 176 $77,675
Standard deviation 0 0 $89,901
Maximum 1,281 176 $326,199
Minimum 1,281 176 -$119,144

Median $70,862
Probability of NPV > 0 84.0%
Coefficient of variation 1.16

Probability

NPV ($)
Output of Simulation in Data Table
Sales Price
Trial Number Units Sold Per Unit NPV
1,281 $176 $33,393
1 1281.0704 175.67021 259228.0877
2 1281.0704 175.67021 197047.8282
3 1281.0704 175.67021 81125.23584
4 1281.0704 175.67021 -64095.1588
5 1281.0704 175.67021 70414.44109
6 1281.0704 175.67021 102442.4944
7 1281.0704 175.67021 193440.3363
8 1281.0704 175.67021 221611.1301
9 1281.0704 175.67021 244631.9469
10 1281.0704 175.67021 -32847.563
11 1281.0704 175.67021 78287.5682
12 1281.0704 175.67021 127871.1186
13 1281.0704 175.67021 23395.95444
14 1281.0704 175.67021 4365.752134
15 1281.0704 175.67021 173916.3276
16 1281.0704 175.67021 216054.3455
17 1281.0704 175.67021 92416.23714
18 1281.0704 175.67021 51924.09105
19 1281.0704 175.67021 57638.10225
20 1281.0704 175.67021 40544.23059
21 1281.0704 175.67021 -79916.2055
22 1281.0704 175.67021 86552.03442
23 1281.0704 175.67021 -1358.11365
24 1281.0704 175.67021 16851.48351
25 1281.0704 175.67021 20454.86709
26 1281.0704 175.67021 19554.32969
27 1281.0704 175.67021 252673.8259
28 1281.0704 175.67021 145571.582
29 1281.0704 175.67021 -13365.4705
30 1281.0704 175.67021 18255.36377
31 1281.0704 175.67021 66698.86388
32 1281.0704 175.67021 1650.71614
33 1281.0704 175.67021 69032.35066
34 1281.0704 175.67021 245179.099
35 1281.0704 175.67021 30197.8414
36 1281.0704 175.67021 97312.57353
37 1281.0704 175.67021 137155.162
38 1281.0704 175.67021 -21360.3929
39 1281.0704 175.67021 125042.1481
40 1281.0704 175.67021 36008.22738
41 1281.0704 175.67021 144876.9132
42 1281.0704 175.67021 147316.6362
43 1281.0704 175.67021 61664.09671
44 1281.0704 175.67021 -60248.0384
45 1281.0704 175.67021 75310.95868
46 1281.0704 175.67021 255216.0173
47 1281.0704 175.67021 146850.7773
48 1281.0704 175.67021 -82164.5043
49 1281.0704 175.67021 13847.69148
50 1281.0704 175.67021 -34357.6124
51 1281.0704 175.67021 89665.32839
52 1281.0704 175.67021 7812.993921
53 1281.0704 175.67021 -13590.7081
54 1281.0704 175.67021 63371.64907
55 1281.0704 175.67021 24434.08428
56 1281.0704 175.67021 101108.7475
57 1281.0704 175.67021 65900.38693
58 1281.0704 175.67021 71309.28639
59 1281.0704 175.67021 100001.8034
60 1281.0704 175.67021 4444.52271
61 1281.0704 175.67021 17278.43645
62 1281.0704 175.67021 79270.07042
63 1281.0704 175.67021 93684.34485
64 1281.0704 175.67021 82167.11454
65 1281.0704 175.67021 326199.0229
66 1281.0704 175.67021 227661.7069
67 1281.0704 175.67021 30275.2618
68 1281.0704 175.67021 84600.94297
69 1281.0704 175.67021 135600.6211
70 1281.0704 175.67021 27640.95718
71 1281.0704 175.67021 38618.46896
72 1281.0704 175.67021 23303.42456
73 1281.0704 175.67021 -24208.0757
74 1281.0704 175.67021 39343.47736
75 1281.0704 175.67021 74391.13332
76 1281.0704 175.67021 114045.4416
77 1281.0704 175.67021 852.3201284
78 1281.0704 175.67021 159767.7307
79 1281.0704 175.67021 75591.82522
80 1281.0704 175.67021 59029.44054
 81 1281.0704 175.67021 80670.35366
82 1281.0704 175.67021 -52360.5802
83 1281.0704 175.67021 134631.5302
84 1281.0704 175.67021 74414.77672
85 1281.0704 175.67021 192452.477
86 1281.0704 175.67021 158839.6557
87 1281.0704 175.67021 -64704.1492
88 1281.0704 175.67021 -119143.567
89 1281.0704 175.67021 224633.316
90 1281.0704 175.67021 124514.0408
91 1281.0704 175.67021 228436.812
92 1281.0704 175.67021 10877.4874
93 1281.0704 175.67021 -69261.2344
94 1281.0704 175.67021 16202.90759
95 1281.0704 175.67021 56889.83485
96 1281.0704 175.67021 137121.5349
97 1281.0704 175.67021 50004.38788
98 1281.0704 175.67021 176186.9858
99 1281.0704 175.67021 199000.5351
100 1281.0704 175.67021 -31413.6508
 1/1/2012

uts are used Unlike scenario

bility distributions and then
nds, of trials, with key results
rom the trials can be averaged to
ogram showing the project's

inputs fro units sold and sales

and means shown next to the
ales price, and NPV change (Hint:

d it is in a different worksheet, see

e will be room for your previous
, rows 33-132. We went into that
Worksheet. Because we pasted
s remained correct. We then

$33,393

al
 Remaining
Book Value
$160,800
52,800
16,800
0

o include

Year 4
1,281
$191.96
$109.27

$245,914
139,983
16,800
$89,131
35,652
$53,479
16,800
$70,279

n net working

Year 4
$245,914

29,510

PV, IRR,
 Year 3 Year 4

$76,106 $70,279
(860) 29,510
15,000
$75,246 $114,789

Years
3 4
$75,246 $114,789
82,771
123,752
118,503
TV = $439,815

o use the MIRR function.

Years
3 4
$75,246 $114,789
($452) $114,337

yellow). When the Data Table is

n Panel A above, run the analysis
for each trial so that we can
he variable to be changed in each
s, but if we tell the Data Table to
uding the random inputs and the
insert each of the Column inputs
ing else, but each time Excel

Don't change the the red cell.

 e Data Table changes. In our
et makes a calculation, the Data
econds. With only 100 rows, it
calculation except for data tables.

ou do a simulation. The summary

a Table below and are updated
he F9 key.

Scratch work for chart: see comments.

Count
Range bottom 0 Percent
-$326,199 0 0%
-$302,899 0 0%
-$279,599 0 0%
-$256,299 0 0%
-$232,999 0 0%
-$209,699 0 0%
-$186,399 0 0%
-$163,100 0 0%
-$139,800 1 1%
-$116,500 0 0%
-$93,200 2 2%
-$69,900 5 5%
-$46,600 4 4%
-$23,300 4 4%
$0 13 13%
NPV ($) $23,300 10 10%
$46,600 10 10%
 $69,900 15 15%
$93,200 6 6%
$116,500 7 7%
$139,800 6 6%
$163,100 2 2%
$186,399 4 4%
$209,699 5 5%
$232,999 4 4%
$256,299 1 1%
$279,599 0 0%
$302,899 1 1%
$326,199 0 0%
Sum 100 100%