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    NPV, Breakeven analysis

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    1) Scenario analysis - XYZ Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:

    Economic Scenario Probability of Outcome NPV
    Recession 0.05 ($70 million)
    Below Average 0.2 (25 million)
    Average 0.5 12 million
    Above Average 0.2 20 million
    Boom 0.05 30 million

    Calculate the project's expected NPV, standard deviation, and coefficient of variation.

    2) Breakeven analysis - A Company sells watches for $25; the fixed costs are $140,000; and variable costs are $15 per watch.

    a. What is the firm's gain or loss at sales of 8,000 watches? At 18,000 watches?

    b. What is the breakeven point? Illustrate by means of a chart.

    c. What would happen to the breakeven point if the selling price were raised to $31? What is the significance of this analysis?

    d. What would happen to the breakeven point if the selling price were raised to $31 but variable costs rose to $23 a unit?

    Please show all calculation in EXCEL so I can follow solutions

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    Solution Preview

    Please see the attached file.

    1)

    Scenario analysis - XYZ Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:

    Economic Scenario Probability of Outcome NPV
    Recession 0.05 ($70 million)
    Below Average 0.2 (25 million)
    Average 0.5 12 million
    Above Average 0.2 20 million
    Boom 0.05 30 million

    Calculate the project's expected NPV, standard deviation, and coefficient of variation.

    XYZ ...

    Solution Summary

    The solution has answers to two questions on capital budgeting (calculation of project's expected NPV, standard deviation, and coefficient of variation) and Breakeven analysis.

    $2.19