CASE45M
Student Version
05/10/13
CRANFIELD INC. (Part II) Risk Analysis Analysis in Capital Budgeting Budgeting Decisions
This case focuses on capital budgeting risk assessment using the lite cranberry juice project that was introduced in Case 12A, Cranfield Inc. (Part I). The model develops incremental cash flow estimates, then calculates NPV, IRR, IRR, MIRR, and Payback for the lite lite orange juice juice project. This model differs from the Case 12A model only in that this one includes three data tables which can greatly facilitate sensitivity analysis. Also, this model contains a graph which can be used to plot the sensitivity diagrams. diagrams. You can change the data tables, tables, then use them to change the graph. If you are using the student version of the model, some of the cells have been blanked out. Before using the model, model, it is necessary to fill in the empty cells cells with the appropriate appropriate formulas. Once this is done, the model is ready for use. The following cells have been deleted: C57, E58, F58.F59, E60, E69, F74, F79.F80, F85, G93, C97, F99 D111, D113, B138, B146
===== == ====== === === ====== ====== ===== ===== ====== === === ====== ====== ====== ====== === === ====== ====== ===== == === ====== ====== === == ===== ====== ===== == === ====== ====== === INPUT DATA:
KEY OUTPUT:
Initial Investment:
Equipment cost Freight Installation Change in NWC
$400,000 $20,000 $40,000 $15,000
NPV IRR MIRR Payback
$195,063 1.0% 19.9% 2.3
Operating Flows and Inflation Rates:
Unit sales t=0 sales price Fixed oper costs t=0 VC per unit Price inflation Cost inflation
400,000 $2.00 $100,000 $1.25 5.0% 2.0%
SV, Taxes, and C of C:
Salvage value Tax rate Cost of capital
$50,000 40% 10%
Cannibalization of Other Projects:
Revenue Loss Cost Reduction Net Ca Cannibalization
$40,000 $20,000
$20,000
======== ================= =============== =========== ========= ========== =========
|:: MODEL-GENERATED DATA: CRANFIELD INC. (PART II) Net Investment Outlay:
Equipment cost Freight Installation Change in NWC
Cash Flows:
Unit price Unit sales
Depreciation Schedule: Basis:
$400,000 20,000 40,000 15,000 -------$475,000 ========
Year 0 -------$2.00
Revenues Fixed operating costs Variable operating costs Total operating costs Depreciation Net cannibalization effects Before tax income Taxes Net income Plus depreciation Net operating cash flow
Year -----1 2 3 4
MACRS Dep. End of Year Factor Expense Book Value -------------------33% $151,800 $308,200 45% 207,000 101,200 15% 69,000 32,200 7% 32,200 0 ------------100% $460,000 ====== ========
Year Year 1 2 --------------$2.10 $2.21 400,000 400,000 --------------$840,000 $882,000 100,000 100,000 510,000 520,200 610,000 620,200 151,800 207,000 20,000 20,000 --------------$58,200 $34,800 23,280 13,920 --------------$34,920 $20,880 151,800 207,000 --------------$186,720 $227,880 --------
Salvage value SV tax Recovery of NWC Termination CF Project NCF
-------($475,000) ========
$460,000
--------------$186,720 $227,880 ======== ========
Year 3 -------$2.32 400,000 -------$926,100 100,000 530,604 630,604 69,000 20,000 -------$206,496 82,598 -------$123,898 69,000 -------$192,898 --------
Year 4 -------$2.43 400,000 -------$972,405 100,000 541,216 641,216 32,200 20,000 -------$278,989 111,596 -------$167,393 32,200 -------$199,593 -------$50,000 20,000 15,000 -------$45,000 --------------$192,898 $244,593 ======== ========
Decision Measures:
Cumulative Cash Flows:
NPV IRR MIRR Payback TV
$195,063.41 1.0% 19.9% 2.3 981,040
0 1 2 3 4
($475,000) (288,280) (60,400) 132,498 377,091
|:: Scenario Analysis:
Scenario -------Worst Base Best
Prob. -----
NPV --------25% ($271,924) 50% $195,063 25% $651,805
IRR
MIRR
-----22.4% 27.2% 61.4%
-----11.1% 19.9% 36.5%
$192,502.11 $326,598 1.7
23.35% 29.87% 1.3
16.31% 17.19% 1.1
IRR: MIRR: 0.01 0.1988042 8.2% 8.9% 14.8% 12.9% 21.1% 16.5%
Payback: 2.3131195 3.38 2.99 2.60
Expected value Standard deviation Coeff. variation Data Tables for Sensitivity Analysis 1. Unit Sales:
Units:
NPV: 195063.4055 ($19,255) 52,184 123,624
Deviation -0.3 -0.2 -0.1
280,000 320,000 360,000
0
400,000
195,063
27.2%
19.9%
2.31
0.1 0.2 0.3
440,000 480,000 520,000
266,503 337,942 409,382
33.0% 38.6% 44.1%
23.0% 25.8% 28.5%
2.09 1.92 1.78
2. Initial Sales Price
Price:
NPV: 195063.4055 ($318,390) (147,239) 23,912
IRR: MIRR: 0.01 0.1988042 -26.2% -16.6% -4.8% 0.3% 12.2% 11.4%
Payback: 2.3131195 4.00 4.00 3.14
Deviation -0.3 -0.2 -0.1
1.40 1.60 1.80
0
2.00
195,063
27.2%
19.9%
2.31
0.1 0.2 0.3
2.20 2.40 2.60
366,215 537,366 708,517
41.0% 54.0% 66.5%
26.9% 32.9% 38.2%
1.85 1.56 1.35
3. Salvage Value
Salvage Value:
NPV: 195063.4055 $188,916 190,965 193,014
IRR: MIRR: 0.01 0.1988042 26.8% 19.6% 26.9% 19.7% 27.0% 19.8%
Payback: 2.3131195 2.31 2.31 2.31
Deviation -0.3 -0.2 -0.1
35,000 40,000 45,000
0
50,000
195,063
27.2%
19.9%
2.31
0.1 0.2 0.3
55,000 60,000 65,000
197,112 199,161 201,211
27.3% 27.4% 27.6%
20.0% 20.1% 20.2%
2.31 2.31 2.31
4. Variable Cost:
VC per Unit:
NPV: 195063.4055 $494,199 394,487 294,775
IRR: MIRR: 0.01 0.1988042 51.0% 31.5% 43.3% 27.9% 35.4% 24.1%
Payback: 2.3131195 1.61 1.78 1.99
Deviation -0.3 -0.2 -0.1
0.88 1.00 1.13
0
1.25
195,063
27.2%
19.9%
2.31
0.1 0.2 0.3
1.38 1.50 1.63
95,352 (4,360) (104,072)
18.6% 9.6% -0.1%
15.1% 9.7% 3.4%
2.76 3.31 4.00
5. Cost of Capital:
WACC:
NPV: 195063.4055 $242,605 226,171 210,333
IRR: MIRR: 0.01 0.1988042 27.2% 18.6% 27.2% 19.0% 27.2% 19.5%
Payback: 2.3131195 2.31 2.31 2.31
Deviation -0.3 -0.2 -0.1
7.0% 8.0% 9.0%
0
10.0%
195,063
27.2%
19.9%
2.31
0.1 0.2 0.3
11.0% 12.0% 13.0%
180,335 166,123 152,404
27.2% 27.2% 27.2%
20.3% 20.7% 21.1%
2.31 2.31 2.31
Inflation (Data Table 2 with NPV as Output Variable)
Price Inflation: 195063.4 0% 1% 2% 3% 4% 5%
6%
-------0% $51,244 87,821 125,097 163,082 201,786 241,221 281,396
Cost Inflation: -------------------------- ------------------- ---------------- ----------------2% 1% 3% 4% $28,384 $5,087 ($18,654) ($42,845) 64,961 41,663 17,922 (6,268) 102,236 78,939 55,198 31,008 140,221 116,924 93,183 68,993 178,926 155,629 131,888 107,698 195,063 218,361 171,323 147,132 258,536 235,238 211,498 187,307
7% 8%
322,322 364,009
299,461 341,148
276,164 317,851
252,423 294,110
228,233 269,920
|:: ======== ================= =============== =========== ========= ========== ========= END
SENSITIVITY ANALYSIS 800000 600000 400000 V P N
200000 0 -200000 -400000 % DEVIATION FROM EXPECTED VALUE Units
Price
Salvage
VC/Unit
wacc
