Part 3. Perform risk analyses for the project. (20 marks)

Your team has identified several key aspects for the project. The following table shows the base-case assumptions, together with the best case and worst case.

Parameter Initial Assumption Worst Case Best case

First-year sales

(as a percentage of the total

revenues in the latest reporting period) 7% 4% 10%

Revenue growth rate 15% for the second year, 10% for the third, Constant after the first Constant after the first year at 15% rate

and 5% annually for the final two years year at a rate of 0%

Project's EBITDA/Sales profit margin Similar to existing projects. +5% to the initial assumption -5% to the initial assumption

Net Working Capital $25,000,000 $35,000,000 $15,000,000

Beta The estimated beta The upper bound of 95% The lower bound of the 95% confidence interval confidence Interval confidence interval

(a) Perform break-even analysis with respect to the first-year sales parameter.

(b) Perform sensitivity analysis for each parameter. Evaluate which parameter is the most important to the project.