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Net Present Value Under Base Case and Alternative Case

Scenario Analysis: Estimated Cash Flows for the Segway People Mover

BaseCase Year0 Year1-12 BicycleScenario Year0 Year1-12
Investment -5400 Investment -5400
Sales 16000 Sales
Variable Costs 13000 Variable Costs
Fixed Costs 2000 Fixed Costs
Depreciation 450 Depreciation
Pretax profit 550 Pretax profit
Taxes @40% 220 Taxes @40%
Profit after tax 330 Profit after tax
Operating cash flow 780 Operating cash flow
Net cash flow -5400 780 Net cash flow -5400

NPV(OCCof 9%): $185.37 NPV(OCCof 9%): --

Consider the scenario in which a competing form of transportation, the bicycle, causes sales to drop to 90% of expected sales from the base case.

a. Fill in the table on the right, including NPV

b. What is maximum opportunity cost of capital in both the Base Case and the Bicycle Scenario such that you should undertake the Segway People Mover Project?

In excel format.

Solution Summary

This solution illustrates how to adjust revenues and expenses for alternative scenarios and how to compute the project's net present value under its base case and alternative scenario. It also illustrates how to compute the maximum opportunity cost of capital at which the company should undertake the project. All computations are done in Excel with Excel functions.

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