Reference no: EM132825276
Question - Practical Exercise on Scenario and Sensitivity analysis - Good Hope Ltd is considering introducing a new product with the following possible outcomes: Worst case, Base case, Best case
Selling price per unit 20, 25, 30
Sales volume (units) 4 000 000, 6 000 000, 8 000 000
Variable cost per unit 15, 13, 11
Fixed operating cost per year 3 500 000, 3 200 000, 3 000 000
Economic life 3, 4, 5
The cost of plant and equipment required is expected to be N$800 000 and residual value of the plant at the end its economic life is expected to be zero, whether economic life is 3, 4 or 5 years. Assume that taxation is not applicable and the company's WACC is 11%. The fixed operating costs do not include depreciation and relate only to cash fixed overheads.
Required -
a) Determine the NPV of the project for each of the three scenarios.
b) What is the expected NPV of the project if the probability of the worst case scenario is 20%, base case is 60% and the best case is 20%?
c) What would happen to the risk of the project if each scenario had equal probability of occurrence?
d) Undertake sensitivity analysis on the selling price, sales volume and variable cost per unit.
e) How does sensitivity analysis differ to scenario analysis?
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