Corporate Finance Ross Mini Case 8Ed Essay example

2565 Words May 9th, 2014 11 Pages
CHAPTER 10
MINOR INTERNATIONAL
PART 1

a. The software consultant is a sunk cost. The consultant is being hired to assist with the decision as to whether to invest in either project or not. This cost will be incurred before the decision for either project is made and is not incremental to either project. Consequently, it is considered a sunk cost.

In addition, the inter-company charge for the computer time is not an incremental cash flow to the firm. Consequently, it is really an internal allocation and should not be considered in the valuation of either project.

Alternative A calculations:

Initial
0
1
2
3
4
5
Investment
-185,000

Cost savings

82,000
82,000
64,000
53,000
37,000
…show more content…
Sensitivity Analysis

Alternative A

Changing the initial investment by ±15% and keeping the cash flows the same as in part a) of the Chapter 10 Mini Case, the NPV’s are calculated in a spreadsheet as follows:

Varying Initial Costs: Base case

Alternative A

Initial
0
1
2
3
4
5
Investment
-185,000

Cost savings

82,000
82,000
64,000
53,000
37,000

Tax @ 35%

28,700
28,700
22,400
18,550
12,950

After tax savings

53,300
53,300
44,600
34,450
24,050

PV @ 15%
-185,000
46,347.83
40,302.46
27,352.68
19,696.90
11,957.10

Tax rate k rate
CCA rate
Cost
Salvage

35.00%
15.00%
30.00%
$125,000
$0

PVCCATS =
40,351.45

NPV =
$1,008.42

Summary of NPV sensitivity as a result of changing the initial investment level.

Alternative A
Investment costs
NPV
Base case
-185,000
1,008.42
Worst case
-212,500
-20,688.86
Best case
-157,250
22,705.70

Alternative A

Changing the cash flows by ±4% and keeping the initial investments the same as in part a) of the Chapter 10 Mini Case, the NPV’s are calculated in a spreadsheet as follows:

Varying Cash Flows: Worst case

Alternative A

Initial
0
1
2
3
4
5
Investment

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