# NPV, IRR, and Sensitivity Analysis

Not what you're looking for?

Crumbly Cookie Company is considering expanding by buying a new (additional) machine that costs $42,000, has zero terminal disposal value and a 10-year useful life. It expects the annual increase in cash revenues from the expansion to be $23,000 per year. It expects additional annual cash costs to be $16,000 per year. Its cost of capital is 6%. Ignore taxes.

1. Calculate the net present value and internal rate of return for this investment.

2. Assume the finance manager of Crumbly Cookie Company is not sure about the cash revenues and costs. The revenues could be anywhere from 10% higher to 10% lower than predicted. Assume cash costs are still $16,000 per year. What are NPV and IRR at the high and low points for revenue?

3. The finance manager thinks that costs will vary with revenues, and if the revenues are 10% higher, the costs will be 7% higher. If the revenues are 10% lower, the costs will be 10% lower. Recalculate the NPV and IRR at the high and low revenue points with this new cost information.

4. The finance manager has decided that the company should earn 2% more than the cost of capital on any project. Recalculate the original NPV in #1 using the new discount rate and evaluate the investment opportunity.

5. Discuss how the changes in assumptions have affected the decision to expand.

* Complete in Excel

##### Purchase this Solution

##### Solution Summary

This solution provides a complete computation of the given finance problem formatted in Excel.

##### Solution Preview

** Please see the attached files for the complete solution response **

Current 10% Decrease

Annual revenues $23,000 $20,700 $22,770

Annual costs $16,000 $16,000 $16,000

Net cash flow $7,000 $4,700 $6,770

Initial outlay -$42,000

Annual cash flow $7,000

Duration 10

Discount rate 8%

Net present value $4,971

Current 10% Higher 10% Lower

Initial outlay -$42,000 -$42,000 -$42,000

Annual cash flow $7,000 $4,700 $9,300

Duration 10 10 10

Discount rate 6% 6% 6%

Net present ...

###### Education

- B. Sc., University of Nigeria
- M. Sc., London South Bank University

###### Recent Feedback

- "Thank you."
- "thank you Chidi Ngene.. if you have any APA references would be great"
- "Thank you so much for your help, your explanations were easy to understand and apply!"
- "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
- "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"

##### Purchase this Solution

##### Free BrainMass Quizzes

##### MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

##### Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

##### Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

##### Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

##### Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking