Part III: Cash Flow Estimation

Use this information to answer questions 18 25

BearKat Enterprises is considering a project where they will make high end designer face masks. They can buy the equipment they need to make the face masks for $275,000 plus another $20,000 for training and installation. They will have to increase inventory by $7,000 and accounts payable will increase $1,000. They think they can sell 25,000 masks a year at a price of $7.00 each for 4 years. The estimate variable costs at 55% of revenue. They follow a four years MACRS schedule for depreciation with the following depreciation rates:

Year 1: 33%

Year 2: 45%

Year 3: 15%

Year 4: 7%

They believe the equipment has a salvage value of $40,000. BearKat Enterprises has a tax rate of 22%. And a WACC of 6.8%. Once the project is done the additional inventory will not need to be purchased and the accounts payable balance will be paid.

Part IV: Sensitivity Analysis

Use this information to answer questions 26 30.

BearKat Enterprises has a WACC of 6.8%

BearKat Enterprises wants you to do a sensitivity analysis where you increase the mask price by 10% and decrease it by 10%. Also see what happens when you increase the variable costs by 10% and decrease them by 10%.

Part V: Scenario Analysis

Use this information to answer questions 31- 34.

Suppose BearKat Enterprises management team decides to do a scenario analysis. They want you to calculate the expected NPV, standard deviation, and coefficient of variation for a new project. (These are not the NPVs that you calculated earlier). They give you the following data:

• Best case has a 25% probability and has an NPV of $32 M.
• Base case has a 50% probability and has an NPV of $11M.
• Worst case has a 25% probability and has an NPV of -$37M.

QUESTION 31

1. Use the information given for part V; Scenario analysis.

   What is the expected NPV of this project?

   	A.	$4.25M
   	B.	$6.85M
   	C.	$14.53M
   	D.	$20.76M

3 points

QUESTION 32

1. Use the information given for part V; Scenario analysis.

   What is the standard deviation of the NPVs of this project?

   	A.	$21.6M
   	B.	$25.31M
   	C.	$27.08M
   	D.	$38.14M

3 points

QUESTION 33

1. Use the information given for part V; Scenario analysis.

   What is the coefficient of variation of the NPVs of this project?

   	A.	2.25
   	B.	3.22
   	C.	4.02
   	D.	5.96

3 points

QUESTION 34

1. A project that has a coefficient of variation of NPVs of 6.7 is less risky than a project that has a coefficient of variation of NPVs of 2.1.

   True

   False