You consider repurposing an existing product for a new market. The initial conversion cost is $20,500. The expected annual cash flows should be $5,000 annually for six years. However, you expect that they will vary between $4,000 and $6,000. Cash flow occurs at the end of each year, and the cost of capital (interest rate) is 11%. But you also estimate that it could be as low as 8% and as high as 18%, depending on the overall economy. You want to decide based on whether the project has a positive net present value (NPV).

a. Assuming that the cost of capital is fixed at 11% but that the annual cash flows could vary for these six years, construct a tornado diagram to show the impact of each year's cash flow on NPV.

b. Assuming that these annual cash flows vary but are consistent across all these six years, construct a strategic region chart using the two-way sensitivity analysis with the interest rate on x axle and the fixed annual cash flow on y axle. Interpret how the cash flows and the interest rate affect your decision.

Answer rating: 100% (QA)

a A tornado diagram shows the sensitivity of NPV to changes in each years cash flows In this case wi... View the full answer