A botanical garden is being planned by a local authority. Its success is heavily dependent on...
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A botanical garden is being planned by a local authority. Its success is heavily dependent on the number of visitors that the garden attracts. By analysing the experience of other similar projects the best, most likely and worst case visitor numbers have been estimated; this has resulted in the following revenue projections: Best case Most likely outcome Worst case £26m p.a. 18% chance £23m p.a. 50% chance £12m p.a. 32% chance Set up costs are £43m and the running costs of the botanical garden are £10m per year; it will last for 5 years before a major refurbishment is needed. The local authority uses an 8% cost of capital. The project manager has already calculated a positive NPV on the basis of the most likely revenue projections and is keen to go ahead with the project. You are the management accountant and you are worried about the risk of the project. Required Assess the risk and uncertainty of the project using (a) Expected values (b) Sensitivity analysis (analyse sensitivity to outlay, visitor numbers and project life) (c) Adjusted payback period on the assumption that the most likely cash flows are used A botanical garden is being planned by a local authority. Its success is heavily dependent on the number of visitors that the garden attracts. By analysing the experience of other similar projects the best, most likely and worst case visitor numbers have been estimated; this has resulted in the following revenue projections: Best case Most likely outcome Worst case £26m p.a. 18% chance £23m p.a. 50% chance £12m p.a. 32% chance Set up costs are £43m and the running costs of the botanical garden are £10m per year; it will last for 5 years before a major refurbishment is needed. The local authority uses an 8% cost of capital. The project manager has already calculated a positive NPV on the basis of the most likely revenue projections and is keen to go ahead with the project. You are the management accountant and you are worried about the risk of the project. Required Assess the risk and uncertainty of the project using (a) Expected values (b) Sensitivity analysis (analyse sensitivity to outlay, visitor numbers and project life) (c) Adjusted payback period on the assumption that the most likely cash flows are used
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Assess the risk and uncertainty of the project using Expected values The expected value of the proje... View the full answer
Related Book For
Essentials of Federal Taxation 2018
ISBN: 9781260007640
9th edition
Authors: Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver
Posted Date:
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