Middleton Classics would like to test the sensitivity of the estimates used for the input data to compute the net present value and internal rate of return on this investment. Ignore the payback period and the accounting rate of return. Consider a, b, and c below independently by holding everything else constant:

a. What is the minimum cost of the investment (to the nearest $100) needed for the owner to accept it?

b. Reset costs to $500,000. What is the minimum salvage value (to the nearest $100) needed for the owner to accept it?

c.Reset salvage value to $25,000. What is the minimum annual cash flow (to the nearest $100) needed for the owner to accept it?

How sensitive to changes in the input data is the decision to accept or reject this investment? Do you have to change the estimates a lot or just a little to make the investment acceptable? Comment on the results of each of these analyses.

 

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1 2 3 4 5 6 7 Cost of investment (initial outlay) 8 Estimated life of investment 9 Estimated salvage value 10 Estimated annual net cash inflow 11 Required rate of retum 12 Answer Section 19 20 13 14 15 Payback period 16 Accounting (average) rate of retum 17 Net present value 18 Internal rate of return 21 22 23 24 25 26 27 28 A 29 30 31 32 33 Data Section 34 35 36 37 38 39 B CAPBUD Capital Budgeting Year C 01234567890 Scratch Pad Cash flow table needed for NPV & IRR calculations NPV Annual Cash Flow 110000 110000 110000 110000 110000 110000 110000 110000 D 110000 110000 Salvage Value 0 0 0 0 0 0 25000 E $500,000 10 years $25,000 $110,000 20.00% FORMULA1 years FORMULA2 FORMULA3 FORMULA4 IRR Combined Flows F -500000 110000 110000 110000 110000 110000 110000 110000 110000 110000 135000 1 2 3 4 5 6 7 Cost of investment (initial outlay) 8 Estimated life of investment 9 Estimated salvage value 10 Estimated annual net cash inflow 11 Required rate of retum 12 Answer Section 19 20 13 14 15 Payback period 16 Accounting (average) rate of retum 17 Net present value 18 Internal rate of return 21 22 23 24 25 26 27 28 A 29 30 31 32 33 Data Section 34 35 36 37 38 39 B CAPBUD Capital Budgeting Year C 01234567890 Scratch Pad Cash flow table needed for NPV & IRR calculations NPV Annual Cash Flow 110000 110000 110000 110000 110000 110000 110000 110000 D 110000 110000 Salvage Value 0 0 0 0 0 0 25000 E $500,000 10 years $25,000 $110,000 20.00% FORMULA1 years FORMULA2 FORMULA3 FORMULA4 IRR Combined Flows F -500000 110000 110000 110000 110000 110000 110000 110000 110000 110000 135000

Answer rating: 100% (QA)

The sensitivity analysis of the Middleton Classics investment shows that the decision to accept or r... View the full answer