Purchase Solution

# Capital budgeting

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1) What is the net investment required at t = 0?
2) What is the operating cash flow in Year 1?
3) What is the operating cash flow in Year 2?
4) What is the operating cash flow in Year 3?
5) What is the project's NPV?

6) After seeing your analysis, the president has asked to recalculate the NPV if the sales volume is only 80,000 units per year instead of 100,000. This is an example of (or a component of)
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

7) After you reevaluated the project based on the lower sales volume, the president asked you to reevaluate the project again, this time considering a lower and higher sales price, a higher and lower variable cost, a higher and lower fixed cost, and a lower and higher salvage value, showing the difference in NPV for the change in each variable. This exercise is an example of:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

8) The boss then asks you to recalculate NPV based on the worst case sales volume, worst case variable cost, and worst case sales price representing an overall downturn in market demand combined with inflationary input markets. In response to this request, you will perform:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis

9) Finally, your boss asks you to calculate, based on the expected values for the sales price and fixed and variable costs, the sales volume required for the net income from the project to cover the cost of the investment. She has requested that you perform
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
D) An unnecessary exercise that will be completely ignored by the capital budgeting committee

10) What is the final cash flow in year 4?

##### Solution Summary

The solution explains how to determine the cash flows and the project's NPV

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