Considering investment in multiyear project

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Reference no: EM131870771

Suppose a friend of yours is considering investment in a multiyear project. The cost is $14,000. Annual cash flows are estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11%, but it could be as low as 9.5% and as high as 12%. The basis of the decision to invest will be whether the project has a positive net present value. Using two input variables (annual cash flow and interest rate), and the base values of $5000 for the cash flows and 11% for the interest rate, construct a tornado diagram of the possible investment NPV. On the basis of the tornado diagram, which input is NPV more sensitive to?

Reference no: EM131870771

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