Capital Budget Risk Analysis

Based on the inputs below prepare a capital budget analysis for this Base Case using the Net Present Value, Internal Rate of Return, Profitability Index and Payback in Years determining whether the project is feasible. All you work should be in a spreadsheet file.

Project Inputs:

WACC Determine the cost of capital for your discounted cash flow.

Debt to Asset for this firm is 65%

Interest rate on the debt is 6.0%

Current Risk-Free Rate is 1.61%

Current Market Premium Rate is 6.89%

The firms beta is 1.15

Project Investment Outlay, Year 0 - $400,000

Project Investment Life 5 years

Project Depreciation - $80,000 / year

Project Salvage Value - $25,000

Working Capital Base of Annual Sales 10%

Expected inflation rate per year, Selling Price Per Unit 2.0%

Expected inflation rate per year, Manufacturing Cost per unit 2.5%

Expected inflation rate per year, Fixed operating costs per year 2.0%

Project Tax Rate 22%

Units sold per year 50,000

Selling Price per Unit, Year 1 - $35

Fixed operating costs per year excluding depreciation - $100,000

Manufacturing costs per unit, Year 1 - $30.00

Inputs continued:

In addition to your base case analysis, please provide a scenario and sensitivity analysis based on the following:

Worst Case Scenario = 20% decrease in sales units sold per year: 25% Probability

Base Case Scenario = 50,000 units sold per year: 55% Probability

Best Case Scenario = 20% increase in sales units sold per year: 20% Probability

Sensitive Variables:

• Selling Price Per Unit
• Manufacturing (variable) Cost Per Unit
• Weighted Average Cost of Capital

+- 10%, 20%, 30%

How does this risk analysis effect Net Present Value? Please show the calculations.