You want to enter the motor mower market and you have made the following predictions for the
Question:
You want to enter the motor mower market and you have made the following predictions for the next five years:
Market share | 30% | Initial Investment | $100,000 |
Market size p.a. (units) | 10,000 | Company Tax Rate | 36% |
+VC per unit | $100 | Depn Expense | $20,000pa |
FC | $90,000 | Life | 5 years |
Sale Price / unit (P) | $210 | RRR | 10% |
You now want to consider the sensitivity of the different variables involved and have determined the worst case / best case / expected outcomes as shown in the table below:
Pessimistic | Expected | Optimistic | |
Market share | 20% | 30% | 40% |
Market size p.a. (units) | 5000 | 10,000 | 15,000 |
+VC per unit | $150 | $100 | $90 |
FC | $100,000 | $90,000 | $80,000 |
Price per unit | $190 | $210 | $250 |
Initial investment | $150,000 | $100,000 | $80,000 |
Determine the annual cash flows for each case.
Calculate NPV of each case @ 10% discount rate
Determine the effect of changing one or more of the variables– for example:
The outcome is as expected but the initial cost is greater (pessimistic)
The outcome is as expected but the market size is smaller (pessimistic)?
Try a few more combinations of your choice
iv. Would you go ahead with the project?
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe