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Alternative B
Investment costs
NPV
Base case
-320,000
-30,130.72
Worst case
-368,000
-67,661.15
Best case
-272,000
7,399.71
Even in the best case situation, the NPV for Alternative B is barely positive. It will be very difficult to achieve a positive gain if the company should proceed and further analysis into the probability of the Best Case occurring could be warranted.
Alternative B
Changing the cash flows by ±40% and keeping the initial investment 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 B
Initial
0
1
2
3
4
5
Investment
-320,000
Cost savings
67,200
74,400
60,600
55,800
33,600
Tax @ 35%
23,520
26,040
21,210
19,350
11,760
After tax savings
43,680
48,360
39,390
36,270 …show more content…
c. Sensitivity and scenario analyses allow managers to determine what the NPV will be given changes in their initial underlying assumptions. In the alternatives examined above, we found that the NPV for Alternative B was only positive in a relatively extreme best case scenario and therefore, from a strict financial standpoint, this project should not be undertaken. For the Alternative A analysis, we found that the NPV is most sensitive to changes in cost savings but that in the worst case scenario changes in the initial investment and changes in cost savings resulted in a negative NPV. As a result, the company will have to be very diligent in ensuring that these cost savings are actually realized.
CHAPTER 14
THE COST OF CAPITAL FOR Lethbridge
COMPUTER, INC.
NOTE: The example below shows the results during Aug 2102 . The actual answer to the case will change based on current market
Investment costs
NPV
Base case
-320,000
-30,130.72
Worst case
-368,000
-67,661.15
Best case
-272,000
7,399.71
Even in the best case situation, the NPV for Alternative B is barely positive. It will be very difficult to achieve a positive gain if the company should proceed and further analysis into the probability of the Best Case occurring could be warranted.
Alternative B
Changing the cash flows by ±40% and keeping the initial investment 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 B
Initial
0
1
2
3
4
5
Investment
-320,000
Cost savings
67,200
74,400
60,600
55,800
33,600
Tax @ 35%
23,520
26,040
21,210
19,350
11,760
After tax savings
43,680
48,360
39,390
36,270 …show more content…
c. Sensitivity and scenario analyses allow managers to determine what the NPV will be given changes in their initial underlying assumptions. In the alternatives examined above, we found that the NPV for Alternative B was only positive in a relatively extreme best case scenario and therefore, from a strict financial standpoint, this project should not be undertaken. For the Alternative A analysis, we found that the NPV is most sensitive to changes in cost savings but that in the worst case scenario changes in the initial investment and changes in cost savings resulted in a negative NPV. As a result, the company will have to be very diligent in ensuring that these cost savings are actually realized.
CHAPTER 14
THE COST OF CAPITAL FOR Lethbridge
COMPUTER, INC.
NOTE: The example below shows the results during Aug 2102 . The actual answer to the case will change based on current market