A B C D E F G H I

5 This worksheet contains the base-case model. It calculates an expansion project's cash flows and
6 performance measures using base-case, or most likely, values for the input variables. It also includes the
basic analysis but with straight-line depreciation.
7
8
9
The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables
10 (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of
11 sensitivity
data tables.
analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way

12
13
14 Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how
15 to use Excel's Scenario Manager for scenario analysis.
16
17 Worksheet 4-Sim extends the basic model to include simulation analysis.
18
19
Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment.
20 Replacement decisions differ from expansion decisions because most of the cash flows are found by
21 subtracting the old project's cash flows from those of the new project to calculate incremental cash flows for
use in the analysis.
22
23
24
25 Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is
made in stages. The first one simply shows the situation where the firm can abandon the project if things
26 are not working out and cash flows are negative. The second one involves a marketing study and a
prototype of the final product designed to learn more about demand before deciding to go into full
27 production.
28
29
30 Worksheet 7-ApdxA provides depreciation tables as described in Appendix A of the textbook.
31
32
33
34 11-1 Identifying Relevant Cash Flows
35
36 A proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it
37 implements the project versus the cash flows it will have if it rejects the project. These are called
38 incremental cash flows.
39
40
41 11-2 Analysis of an Expansion Project
42
43
44
45 The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are
used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in
46 the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the
47 values in the Input Section, the model recalculate almost instantly, causing changes in NPV and other output
variables. You can see the effect in the Key Results box shown above. If you change an input value but later
want to return to the base case, use Scenario Manager to select the Base-Case. In Excel 2010, select Data,
What-If-Analysis, Scenario Manager.
 The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are
used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in
the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the
A in the Input
values B Section, C D
the model recalculate E
almost F causing G
instantly, H and other Ioutput
changes in NPV
48 variables. You can see the effect in the Key Results box shown above. If you change an input value but later
want to return to the base case, use Scenario Manager to select the Base-Case. In Excel 2010, select Data,
49 What-If-Analysis, Scenario Manager.
50
51
52 Figure 11-1

53 Analysis of an Expansion Project: Inputs and Key Results (Dollars in Thousands)

54 Part 1. Inputs and Key Results

55
56 Inputs Base-Case Key Results
57 Equipment cost $7,750 NPV $1,048
58 Salvage value, equipment, Year 4 $639 IRR 13.79%
59 Opportunity cost $0 MIRR 12.78%
60 Externalities (cannibalization) $0 PI 1.10
61 Units sold, Year 1 10,000 Payback 3.39
62 Annual change in units sold, after Year 1 15% Discounted payback 3.80
63 Sales price per unit, Year 1 $1.50
64 Annual change in sales price, after Year 1 4%
65 Variable cost per unit (VC), Year 1 $1.07
66 Annual change in VC, after Year 1 3%
67 Nonvariable cost (Non-VC), Year 1 $2,120
68 Annual change in Non-VC, after Year 1 3%
69 Project cost of capital, r 10%
70 Tax rate 40%
71 Working capital as % of next year's sales 15%
72
73
74
75
76 The model uses the "Base-Case" input values shown below to calculate the NPV and other performance
measures. The model assumes that the firm uses accelerated depreciation; a modified version of the model,
77 shown to the model's right, shows the results if the firm elects to use straight-line depreciation. This
78 analysis demonstrates that accelerated depreciation improves project profitability.
79
80 Figure 11-2
Analysis of a New (Expansion) Project: Cash Flows and Performance Measures
81 (Dollars in Thousands)

82
83 Part 2. Cash Flows and Performance Measures
84 Intermediate Calculations 0 1 2 3 4
85 Unit sales 10,000 11,500 13,225 15,209
86 Sales price per unit $1.50 $1.56 $1.62 $1.69
87 Variable cost per unit (excl. depr.) $1.07 $1.10 $1.14 $1.17
88 Nonvariable costs (excl. depr.) $2,120 $2,184 $2,249 $2,317
89 Sales revenues = Units × Price/unit $15,000 $17,940 $21,456 $25,662
90 NOWCt = 15%(Revenuest+1) $2,250 $2,691 $3,218 $3,849 $0
91 Basis for depreciation $7,750
92 Annual depreciation rate (MACRS) 33.33% 44.45% 14.81% 7.41%
93 Annual depreciation expense $2,583 $3,445 $1,148 $574
94 Remaining undepreciated value $5,167 $1,722 $574 $0
 A B C D E F G H I
95 Cash Flow Forecast Cash Flows at End of Year
96 0 1 2 3 4
97 Sales revenues = Units × Price/unit $15,000 $17,940 $21,456 $25,662
98 Variable costs = Units × Cost/unit $10,700 $12,674 $15,013 $17,782
99 Nonvariable costs (excluding depr.) $2,120 $2,184 $2,249 $2,317
100 Depreciation $2,583 $3,445 $1,148 $574
101 Earnings before int. and taxes (EBIT) −$403 −$363 $3,047 $4,988
102 Taxes on operating profit (40% rate) −$161 −$145 $1,219 $1,995
103 Net operating profit after taxes −$242 −$218 $1,828 $2,993
104 Add back depreciation $2,583 $3,445 $1,148 $574
105 Equipment purchases −$7,750
106 Salvage value $639
107 Cash flow due to tax on salv. val. −$256
108 Cash flow due to change in WC −$2,250 −$441 −$527 −$631 $3,849
109 Opportunity cost, after taxes $0 $0 $0 $0 $0
110 After-tax externalities $0 $0 $0 $0
111 Project net cash flows: Time Line −$10,000 $1,900 $2,700 $2,345 $7,800
112 Project Evaluation Measures
113 NPV $1,048 =NPV(E69,F111:I111)+E111
114 IRR 13.79% =IRR(E111:I111)
115 MIRR 12.78% =MIRR(E111:I111,E69,E69)
116 Profitability index 1.10 =NPV(E69,F111:I111)/(−E111)
117 Payback 3.39 =PERCENTRANK(E120:I120,0,6)*I119
118 Disc. payback 3.80 =PERCENTRANK(E122:I122,0,6)*I119
119 Calculations for Payback Year: 0 1 2 3 4
120 Cumulative cash flows for payback −$10,000 −$8,100 −$5,400 −$3,055 $4,745
121 Disc. cash flows for disc. payback −$10,000 $1,727 $2,231 $1,762 $5,328
122 Cumulative discounted cash flows −$10,000 −$8,273 −$6,041 −$4,279 $1,048
123
124
 A B C D E F G H I
48
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54
55
56 Inflation Omitted
57 $7,750
58 $639
59 $0
60 $0
61 10,000
62 15%
63 $1.50
64 0%
65 $1.07
66 0%
67 $2,120
68 0%
69 10%
70 40%
71 15%
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 A B C D E F G H I
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56 Base-Case
57 $7,750
58 $639
59 $0
60 $0
61 10,000
62 15%
63 $1.50
64 4%
65 $1.07
66 3%
67 $2,120
68 3%
69 10%
70 40%
71 15%
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 A B C D E F G H I
48
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56 Project S
57 $8,750
58 $433
59 $0
60 $0
61 10,000
62 0%
63 $2.50
64 -5%
65 $1.64
66 6%
67 $1,815
68 4%
69 10%
70 40%
71 5%
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 A B C D E F G H I
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92 Annual depreciation rate (MACRS) 33.33% 44.45% 14.81% 7.41%
93
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 A B C D E F G H I
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92 Annual depreciation rate (Straight-Line) 16.67% 33.33% 33.33% 16.66%
93
94
 A B C D E F G
1
2 Worksheet 2-Sensitivity Analysis
3
4 This worksheet extends the basic model (shown in Tab 1-Base-Case) to include sensitivity analysis. This worksheet also illustrates
5 special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables.
We also include a brief tutorial for Data Tables.
6
7
8
9 For ease of reference, we repeat Figure 11-1, Analysis of an Expansion Project: Inputs and Key Results (Dollars in Thousands)
10 Figure 11-1 (Repeated Here for Convenience)
11 Analysis of an Expansion Project: Inputs and Key Results (Dollars in Thousands)
12 Part 1. Inputs and Key Results
13
14 Inputs Base-Case Key Results
15 Equipment cost $7,750 NPV
16 Salvage value, equipment, Year 4 $639 IRR
17 Opportunity cost $0 MIRR
18 Externalities (cannibalization) $0 PI
19 Units sold, Year 1 10,000 Payback
20 Annual change in units sold, after Year 1 15% Discounted payback
21 Sales price per unit, Year 1 $1.50
22 Annual change in sales price, after Year 1 4%
23 Variable cost per unit (VC), Year 1 $1.07
24 Annual change in VC, after Year 1 3%
25 Nonvariable cost (Non-VC), Year 1 $2,120
26 Annual change in Non-VC, after Year 1 3%
27 Project cost of capital (r) 10%
28 Tax rate 40%
29 Working capital as % of next year's sales 15%
30
31
32
33
34 The model uses the "Base-Case" input values shown below to calculate the NPV and other performance measures. The model assumes
35 that the firm uses accelerated depreciation; a modified version of the model, shown to the model's right, shows the results if the firm
36 elects to use straight-line depreciation. This analysis demonstrates that accelerated depreciation improves project profitability.
37
38 Figure 11-2 (Repeated Here for Convenience)
39 Analysis of a New (Expansion) Project: Cash Flows and Performance Measures
(Dollars in Thousands)
40
41 Part 2. Cash Flows and Performance Measures
42 Intermediate Calculations 0 1 2
43 Unit sales 10,000 11,500
44 Sales price per unit $1.50 $1.56
45 Variable cost per unit (excl. depr.) $1.07 $1.10
46 Nonvariable costs (excl. depr.) $2,120 $2,184
47 Sales revenues = Units × Price/unit $15,000 $17,940
 A B C D E F G
48 NOWCt = 15%(Revenuest+1) $2,250 $2,691 $3,218
49 Basis for depreciation $7,750
50 Annual depreciation rate (MACRS) 33.33% 44.45%
51 Annual depreciation expense $2,583 $3,445
52 Remaining undepreciated value $5,167 $1,722
53 Cash Flow Forecast Cash Flows at End of Year
54 0 1 2
55 Sales revenues = Units × Price/unit $15,000 $17,940
56 Variable costs = Units × Cost/unit $10,700 $12,674
57 Nonvariable costs (excluding depreciation) $2,120 $2,184
58 Depreciation $2,583 $3,445
59 Earnings before interest and taxes (EBIT) −$403 −$363
60 Taxes on operating profit (40% rate) −$161 −$145
61 Net operating profit after taxes −$242 −$218
62 Add back depreciation $2,583 $3,445
63 Equipment purchases −$7,750
64 Salvage value
65 Cash flow due to tax on salvage value (40% rate)
66 Cash flow due to change in WC −$2,250 −$441 −$527
67 Opportunity cost, after taxes $0 $0 $0
68 After-tax cannibalization or complementary effect $0 $0
69 Project net cash flows: Time Line −$10,000 $1,900 $2,700
70 Project Evaluation Measures
71 NPV $1,048
72 IRR 13.79%
73 MIRR 12.78%
74 Profitability index 1.10
75 Payback 3.39
76 Discounted payback 3.80
77 Calculations for Payback Year: 0 1 2
78 Cumulative cash flows for payback -$10,000 -$8,100 -$5,400
79 Discounted cash flows for disc. payback -$10,000 $1,727 $2,231
80 Cumulative discounted cash flows -$10,000 -$8,273 -$6,041
81
82
83
84 11-5 Sensitivity Analysis
85
86
87
88 Risk in capital budgeting really means the probability that the actual outcome will be
89 worse than the expected outcome. For example, if there were a high probability that the
90 expected NPV as calculated above will actually turn out to be negative, then the project
91 would be classified as relatively risky. The reason for a worse-than-expected outcome is,
typically, because sales were lower than expected, costs were higher than expected, or the
92 project turned out to have a higher than expected initial cost. In other words, if the
93 assumed inputs turn out to be worse than expected, then the output will likewise be
94 worse than expected. We use data tables below to examine the project's sensitivity to
changes in the input variables.
95
96
97
 A B C D E F G
98
99 Following is a tutorial for constructing a Data Table to be used in sensitivity analysis. This section may be skipped if you already know
how to construct data tables.
100
101
102 Instructions for Constructing Data Tables:
103
104 Step 1:
105
106 Deviation Sales NPV
107 from Base Price/unit
108 -30% Set up the Data Table by typing in the labels and numbers shown here. The column for
sales price/unit is the input range and the column for NPV is the output range. Data Tables
109 0% $1.50
take each input value and then automatically calculate a new output based on the input. Be
110 30% sure to type in the actual sales price of $1.50 and not a formula. Every year we have
111 students who make this mistake! Don't be one of them!
112 Step 2:
113
114 Enter the formula =$B$117*(1+A116) into the light green cell and then copy it into the
Deviation Sales NPV light blue cell. This sets up the input range's values of sales prices for which you want new
115 from Base Price/unit NPV's to be calculated. It is ok to have a formula in the input range, but be sure that none of
116 -30% $1.05 these inputs is a formula that refers back to the actual value of sales in the input section of
the worksheet.
117 0% $1.50
118 30% $1.95
119
120 Step 3:
121
122 Deviation Sales NPV Enter into the tan cell a formula that refers to the cell in the results section which shows
123 from Base Price/unit $1,048.16 the NPV for the given set of inputs. In this example, that is =$I$15. Notice that the tan cell
will show the current value of NPV.
124 -30% $1.05
125 0% $1.50
126 30% $1.95
127
128 Deviation Sales NPV Now use your cursor to highlight the range we show in gray (this is called the Data Table
129 from Base Price/unit $1,048.16 range); notice that this highlighted range includes the cells for the new inputs for price and
the cell for the reference to NPV.
130 -30% $1.05
131 0% $1.50
132 30% $1.95
133
134 With the range still highlighted, open the Table dialog box. In Excel 2010,
select Data, What-If-Analysis, then Data Table.
135
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140
141
142 This next step is a bit tricky, so be careful. The cursor in the dialog box will be blinking in the "Row input cell:" box. Here you have to tell
143 Excel if the inputs in your Data Table are arranged in a row or a column. Excel assumes a row, but this is not correct in our example--
your inputs are in a column, Column B. So, you click on the "Column input cell" box, causing the cursor to blink in that box.
144
145
146
147 Excel wants to know where the input variable, sales price, first enters the model. If you look up in the Input Data section, you will see
that it enters in cell E21, so you type E21 in the Column input cell (or click on cell E21 to enter it). Here's the final, completed, dialog
box:
 A to know where
Excel wants B the inputCvariable, sales D E the model. IfFyou look up inGthe Input Data section, you will see
price, first enters
148 that it enters in cell E21, so you type E21 in the Column input cell (or click on cell E21 to enter it). Here's the final, completed, dialog
box:
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159 When you click OK, Excel will calculate NPV at the three input values specified in your Data Table, insert them in the table, leaving the
Data Table as shown below.
160
161
162 Deviation Price NPV
163 from Base $1,048.16
164 -30% $1.05 -$9,852.23
165 0% $1.50 $1,048.16
166 30% $1.95 $11,948.54
167
168
 A B C D E F G
169
170
We used Data Tables to create inputs for the sensitivity graph. (First, be sure the Base-Case scenario is showing.) Note that the portion
171 of the rows that are in the Data Tables are shown in shaded colors.
172
173 Deviation Equipment NPV Deviation Unit Sales NPV Deviation
174 from Base $1,048 from Base $1,048 from Base
175 -30% $5,425 $2,599 -30% 7,000 -$1,999 -30%
176 0% $7,750 $1,048 0% 10,000 1,048 0%
177 30% $10,075 -$503 30% 13,000 4,096 30%
178
179 Deviation VC/Unit NPV Deviation Non-VC NPV Deviation
180 from Base $1,048 from Base $1,048 from Base
181 -30% $0.75 $8,901 -30% $1,484 $2,309 -30%
182 0% 1.07 1,048 0% 2,120 1,048 0%
183 30% 1.39 -6,805 30% 2,756 -213 30%
184
185
186 The following graph is meaningful only if the scenario is set to the Base-Case.
187 Figure 11-3
188 Sensitivity Graph for Solar Water Heater Project (Dollars in Thousands)
189
190 NPV ($)
191 $14,000
192 $12,000
193
$10,000
194
195 $8,000
196 $6,000
197 $4,000
198 $2,000
199
$0
200
201 −$2,000
202 −$4,000
203 −$6,000
204 −$8,000
205
206 −$10,000
207 −$12,000
208 −45% −30% −15% 0% 15% 30% 45%
209 % Deviation from Base
210
211 Data for Sensitivity Graph
212 Deviation NPV with Variables at Different Deviations from Base
213 from Base Equip. Price Units VC/Unit Non-VC r
214 −30% $2,599 −$9,852 −$1,999 $8,901 $2,309 $1,999
215 0% $1,048 $1,048 $1,048 $1,048 $1,048 $1,048
216 30% −$503 $11,949 $4,096 −$6,805 −$213 $205
217 Range $3,102 $21,801 $6,095 $15,706 $2,521 $1,794
218
 A B C D E F G
219
220 Tornado Diagrams
221
Tornado diagrams are another way to present results from sensitivity analysis. A tornado shows the range of outcomes caused by
222 changes in each input variable in graphic form, with the input variable causing the widest range shown at the top of the chart and the
input variable causing the smallest range at the bottom, which makes the chart look like a tornado.
 A B C D E F G
223
The good news is that a tornado diagram makes it immediately obvious which inputs have the biggest impacts on NPV. The bad news is
224 that there is no simple way to create a tornado diagram in Excel. However, we show two methods that are not too difficult. The first is
shown below, and the second is show to the right.
225
The first step is to rank the range of possible NPV's for each of the input variables that is being changed. We used the RANK function, as
226 shown in the rose-colored area below. In our example, the range for sales price/unit is the largest and the range for the project cost of
capital (r) is the smallest.
227

In the yellow figure below, we created an XY scatter chart, with three X-values for each of the input variables (the -30%, 0%, and 30%
deviations shown in the "Data for Sensitivity Graph" shown above). The Y-values for each series are the corresponding rank (with the
228 same rank repeated for all 3 X-values) for the input, shown below in the rose and aqua areas (the aqua areas are just a repeat of the rose
areas so that each X-value will have a Y-value). To summarize, each variable is plotted so that its "width" on the X-axis is determined by
the impact it has on NPV, and its "height" on the chart (the Y-axis) determined by the input's rank in terms of the NPV's sensitivity.

229
It is helpful to also plot a vertical line showing the base-case NPV. To do this, we have all 3 X-values equal to the base-case NPV and let
230 the corresponding Y-values go from the lowest rank to the highest rank (shown in the area below with the nauseating green-gold-brown
shade.)
231
In the final presentation of the tornado diagram below, we set the vertical axis to cross the horizontal axis at the maximum vertical
value (i.e., we put the X-axis at the top of the chart instead of at the bottom). For the vertical axis (the Y-axis), we checked "None" for tick
232 marks and for labels, so the chart doesn't show this axis. Finally, we formatted the "right" data points for each series to show the series
name. These changes are purely cosmetic in nature.

233
The advantage of this method is that the chart below will update automatically if you change the model (and also update the data
234 tables). For a slightly less complicated approach that requires manual intervention, see the example to the right.

235
236
237 Additional data for Tornado Diagram
238
239 Rank of Range of NPV from Sensitivity Table Above
240 Equipment Price Units VC/Unit Non-VC r
241 Rank 3 6 4 5 2 1
242 3 6 4 5 2 1
For diagram
243 below 3 6 4 5 2 1
244
245
246 Figure 11-4

247 Tornado Diagram for Solar Water Heater Project: Range of Outcomes for Input Deviations from Base-Case
(Dollars in Thousands)
248
249
250 NPV
251 −$15... −$10... −$5 $0 $5 $10 $15
252
253 Base = $1,048
254
255
256
 NPV
−$15... −$10... −$5 $0 $5 $10 $15

Base = $1,048

A B C D E F G
257
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266

267
 A B C D E F G
268 NPV Breakeven Analysis
269
270
271 In breakeven analysis, we find the value of the input variable that produces a zero NPV. It is easiest to do this with Goal
272 Seek. For example, the screen shot below shows the Goal Seek inputs we used to set the cell for NPV to a value of zero by
273 changing the cell for the sales price. We repeated this for the other inputs.
274
275
276
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280
281
282
283
284
285 Table 11-1
286
287 Input Input Value that Produces Zero NPV
288 Sales price per unit, Year 1 $1.4567
289 Variable cost per unit (VC), Year 1 $1.1128
290 Annual change in units sold, after Year 1 7.40%
291 Units sold, Year 1 8,968
292 Nonvariable cost (Non-VC), Year 1 $2,649
293 Project r 13.79%
294

295

296 Data Tables: Multiple Outputs for a Single Input

297 NPV Breakeven Analysis (Dollars in Thousands)
298
299
300
Data tables can easily be extended to show multiple outputs for a single input. Simply add an additional column with a
301 cell reference to the desired additional output. Highlight the specified values for the input and highlight all the columns
302 for the output as we show shaded in gray below (be sure to also highlight the cell references above the outputs). Then use
303 the Data, Tables, and set "Column input" to the cell reference of the desired input.
304
305 Example: NPV and IRR for Changes in Sales Price
306
307 % Deviation SALES PRICE
308 from Sales NPV IRR
309 Base Case Price $1,048 13.8%
310 -30% $1.05 -$9,852 Not found
311 -15% $1.28 -$4,402 -8.3%
312 0% $1.50 $1,048 13.8%
313 15% $1.73 $6,498 31.2%
314 30% $1.95 $11,949 46.1%
315
316
 A B C D E F G
317 Two-Way Data Tables: Two Inputs and One Output
318
319
320
321
322
323 Data tables can also be extended to show the output given two inputs. Put one set of input variables in the left-most
324 column of the data table (shown in a red font below) and the other set of inputs in the top row of the data table (shown in
325 white font); put the cell reference to the output you want (like NPV) in the intersection of the row and column for inputs
(we show this in a pale green font). Highlight the range that includes the specified values for the inputs, as shown in the
326 gray shaded region below (this will also highlight the cell reference for the output). Then use the Data, Tables, and set
327 "Row input" to the cell reference for the inputs shown in the table's row E19 for units sold) and set "Column input" to the
328 cell reference for the input shown in the table's column E21 for sales price).
329
330 Example: NPV for Changes in Sales Price and Units Sold
331
332 % Deviation from Base Case
333 -30% -15% 0% 15%
% Deviation NPV cell
334 from reference Units Sold
335 Base Case $1,048 7,000 8,500 10,000 11,500
336 -30% $1.05 -$9,630 -$9,741 -$9,852 -$9,963
Sales Price

337 -15% $1.28 -$5,815 -$5,108 -$4,402 -$3,696

338 0% $1.50 -$1,999 -$476 $1,048 $2,572
339 15% $1.73 $1,816 $4,157 $6,498 $8,840
340 30% $1.95 $5,631 $8,790 $11,949 $15,107
341
 H I J K L M N
1 7/24/2013
ty Analysis 2
3
4 worksheet also illustrates
e sensitivity analysis. This
5
a tables with multiple outputs, and two-way data tables.
6
7
8
Inputs and Key Results9(Dollars in Thousands)
10
11
12
13
14 Key Results
NPV 15 $1,048
IRR 16 13.79%
MIRR 17 12.78%
PI 18 1.10
Payback 19 3.39
20payback
Discounted 3.80
21
22
23
24
25
26
27
28
29
30
31
32
33
34measures. The model assumes
V and other performance
35 shows the results if the firm
hown to the model's right,
36
erated depreciation improves project profitability.
37
38
39
40
41
42 3 4
43 13,225 15,209
44 $1.62 $1.69
45 $1.14 $1.17
46 $2,249 $2,317
47 $21,456 $25,662
 H I J K L M N
48 $3,849 $0
49
50 14.81% 7.41%
51 $1,148 $574
52 $574 $0
53 at End of Year
Cash Flows
54 3 4
55 $21,456 $25,662
56 $15,013 $17,782
57 $2,249 $2,317
58 $1,148 $574
59 $3,047 $4,988
60 $1,219 $1,995
61 $1,828 $2,993
62 $1,148 $574
63
64 $639
65 −$256
66 −$631 $3,849
67 $0 $0
68 $0 $0
69 $2,345 $7,800
70
71
72
73
74
75
76
77 3 4
78 -$3,055 $4,745
79 $1,762 $5,328
80 -$4,279 $1,048
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
 H I J K L M N
98
alysis. This section may 99be skipped if you already know
100
101
102
103
104
105
106
107
108 shown here. The column for
in the labels and numbers
e and the column for NPV is the output range. Data Tables
utomatically calculate109 a new output based on the input. Be
ice of $1.50 and not a 110
formula. Every year we have
Don't be one of them!111
112
113
+A116) into the light green
114 cell and then copy it into the
put range's values of sales prices for which you want new
have a formula in the 115input range, but be sure that none of
ers back to the actual 116
value of sales in the input section of
117
118
119
120
121
a that refers to the cell122
in the results section which shows
s. In this example, that123is =$I$15. Notice that the tan cell
PV.
124
125
126
127
the range we show in128 gray (this is called the Data Table
ed range includes the cells
129 for the new inputs for price and
130
131
132
133
ll highlighted, open the Table dialog box. In Excel 2010,
-If-Analysis, then Data134Table.
135
136
137
138
139
140
141
142 cell:" box. Here you have to tell
blinking in the "Row input
assumes a row, but this143 is not correct in our example--
" box, causing the cursor to blink in that box.
144
145
146
147
el. If you look up in the Input Data section, you will see
ell E21 to enter it). Here's the final, completed, dialog
 H I J K L M N
148
149
150
151
152
153
154
155
156
157
158
159them in the table, leaving the
in your Data Table, insert
160
161
162
163
164
165
166
167
168
 H I J K L M N
169
170
he Base-Case scenario is showing.) Note that the portion
171
172
173 Sales
Price/unit NPV
174 $1,048
175 $1.05 -$9,852
176 1.50 1,048
177 1.95 11,949
178
179 Project r NPV
180 $1,048
181 7.00% $1,999
182 10.00% 1,048
183 13.00% 205
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
 H I J K L M N
219
220
221
. A tornado shows the range of outcomes caused by
222at the top of the chart and the
the widest range shown
t look like a tornado. Alternative Method (but one requires manual intervention if the model changes)
 H I J K L M N
223
inputs have the biggest impacts on NPV. The bad news is
show two methods that224are not too difficult. The first is
Create a "Row" Data Table for each input, as shown in the pale blue areas below.
225 Base Case
les that is being changed. We used the RANK function, as
226
e/unit is the largest and the range for the project cost of
Equipment $7,750
227 NPV $1,048

for each of the input variables (the -30%, 0%, and 30%
es for each series are the corresponding rank (with the
nd aqua areas (the aqua228areas are just a repeat of the rose
plotted so that its "width" on the X-axis is determined by
by the input's rank in terms of the NPV's sensitivity.
Base Case
229 Units 10,000
e have all 3 X-values equal to the base-case NPV and let
230
n in the area below with the nauseating green-gold-brown
NPV $1,048
231 Base Case
to cross the horizontal axis at the maximum vertical
r the vertical axis (the Y-axis), we checked "None" for tick
the "right" data points232
for each series to show the series
Non-VC $2,120
233 NPV $1,048
if you change the model (and also update the data
ntion, see the example234
to the right.
Copy as values the blue from the Data Tables above. Also copy as values the Diffe
235 purple area below and sort the data based on Differences in Ascending order.
236 NPV -30%
237 r $1,999
238 Scratch for Tornado Diagram Non-VC $2,309
239 Below Equipment $2,599
240 Base NPV = Y-axis Units sold -$1,999
241 $1,048 8 VC/Unit $8,901
242 1,048 7 Price -$9,852
243 1,048 1
244 Select the data in the purple table above (don't include the Difference). Click Inse
245
246
247 Price
248
249
VC/Unit
250
251
252 Units sold
253
254
255 Equipment
256
Non-VC

-$15,000 -$10,000 -$5,000 $0 $5,000 $10,000

 VC/Unit

Units sold

Equipment
H I J K L M N
257
258 Non-VC
259
260 r
261
262
263 -$15,000 -$10,000 -$5,000 $0 $5,000 $10,000
264
265

266 You can make the chart "prettier" by moving the Y-axis labels to the left, remove
made a copy of the chart above so that you could still see the "first" step and did
the choose "Value (Category) Axis" from the drop down menu at the top left of th
right-clicking on the Y-axis. Set tick marks to "None", then choose "Low" for tick
(you can follow the previous steps except choose the Horizontal (Value) Axis; eve
axis and click on the X-axis). For the section on "Vertical axis crosses" choose the
267
 H I J K L M N
268
269
Price
270
271
ero NPV. It is easiest to do this with Goal
to set the cell for NPV 272
to a value of zero by
273 VC/Unit
274
275
276 Units sold
277
278
279 Equipment
280
281
282 Non-VC
283
284
285 r
286
287
288 -$15,000 -$10,000 -$5,000 $0 $5,000 $10,0
289
290
291
292
293
294
To complete the formatting, select one of the series (as describe above, except ch
295 on one of the series; or leave the previous dialog box open and click on one of the
Series Options, slide the "Series Overlap" slider all the way to the right for "No ov
the series, click on the chart, click Design, then Selct Data, then edit the label for e
296
297
298 Price
299
300
Simply add an additional column with a
301all the columns
or the input and highlight VC/Unit
302
ell references above the outputs). Then use
put. 303
304
305 Units sold
306
307
308 Equipment
309
310
311 Non-VC
312
313
314 r
315
316 -$15,000 -$10,000 -$5,000 $0 $5,000 $10,0
 Non-VC

H I J K L M N
-$15,000 -$10,000 -$5,000 $0 $5,000 $10,0
317
318
319
320
321
322
323
set of input variables in the left-most
s in the top row of the324
data table (shown in
rsection of the row and325column for inputs
ied values for the inputs, as shown in the
326
put). Then use the Data, Tables, and set
327 input" to the
r units sold) and set "Column
328
329
330
331
tion from Base Case 332
333 30%

334
Units Sold
335 13,000
336 -$10,075
337 -$2,989
338 $4,096
339 $11,181
340 $18,266
341
 O P Q R S T U V
219
220
221

222
lternative Method (but one requires manual intervention if the model changes)
 O P Q R S T U V
223

224
reate a "Row" Data Table for each input, as shown in the pale blue areas below. Compute the difference in the column next to the table.
225 -30% 30% Base Case -30% 30%

226
$5,425 $10,075 Difference Price $1.50 $1.05 $1.95
227 $2,599 -$503 $3,102 NPV $1,048 -$9,852 $11,949

228

-30% 30% Base Case -30% 30%

229 7,000 13,000 Difference VC/Unit $1.07 $0.75 $1.39

230
-$1,999 $4,096 $6,095 NPV $1,048 $8,901 -$6,805
231 -30% 30% Base Case -30% 30%

232
$1,484 $2,756 Difference r 10% 7% 13%
233 $2,309 -$213 $2,521 NPV $1,048 $1,999 $205

234
opy as values the blue from the Data Tables above. Also copy as values the Differences. Put these data in the
235
urple area below and sort the data based on Differences in Ascending order.
236 30% Difference
237 $205 $1,794
238 -$213 $2,521
239 -$503 $3,102
240 $4,096 $6,095
241 -$6,805 $15,706
242 $11,949 $21,801
243
244table above (don't include the Difference). Click Insert, Bar Chart, and pick the first one (it is the Clustered Bar in the 2-D section).
elect the data in the purple
245
246
247 Price
248
249
VC/Unit
250
251
252 Units sold
253
254 Column O
255 Equipment Column N
256
Non-VC

-$15,000 -$10,000 -$5,000 $0 $5,000 $10,000 $15,000

 VC/Unit

Units sold
Column O
Equipment Column N
O P Q R S T U V
257
258 Non-VC
259
260 r
261
262
-$15,000 -$10,000
263-$5,000 $0 $5,000 $10,000 $15,000
264
265

266 by moving the Y-axis labels to the left, remove Y-axis tick marks, and by having the Y-axis cross at the base-case NPV. We
ou can make the chart "prettier"
ade a copy of the chart above so that you could still see the "first" step and did these actions to get the chart below. Click on the chart, then Select Layout,
he choose "Value (Category) Axis" from the drop down menu at the top left of the menu ribbon, then Format Selection (or you can do this more directly by
ght-clicking on the Y-axis. Set tick marks to "None", then choose "Low" for tick mark labels (in this type of chart, low means left). Now format the X-axis
you can follow the previous steps except choose the Horizontal (Value) Axis; even easier, don't close the dialog box you had open when formatting the Y-
xis and click on the X-axis). For the section on "Vertical axis crosses" choose the manual option and fill in the base-case value, 1048 in this example.
267
 O P Q R S T U V
268
269
Price
270
271
272
VC/Unit 273
274
275
Units sold 276
277
278 Column O
Equipment 279 Column N
280
281
Non-VC 282
283
284
r 285
286
287
288
-$15,000 -$10,000 -$5,000 $0 $5,000 $10,000 $15,000
289
290
291
292
293
294
o complete the formatting, select one of the series (as describe above, except choose Series 1 or Series 2; or click
295the previous dialog box open and click on one of the series. In the format box for
n one of the series; or leave
eries Options, slide the "Series Overlap" slider all the way to the right for "No overlap". To change the names of
he series, click on the chart, click Design, then Selct Data, then edit the label for each series.
296
297
Price 298
299
300
VC/Unit 301
302
303
304
Units sold 305
306 30%
307
Equipment -30%
308
309
310
Non-VC 311
312
313
r 314
315
316
-$15,000 -$10,000 -$5,000 $0 $5,000 $10,000 $15,000
Non-VC

O P Q R S T U V
-$15,000 -$10,000 -$5,000 $0 $5,000 $10,000 $15,000
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
 W X
223

224

225

226
Difference
227 $21,801

228

229 Difference

230
$15,706
231

232
Difference
233 $1,794

234

235
236
237
238
239
240
241
242
243
244
one (it is the Clustered Bar in the 2-D section).
245
246
247
248
249
250
251
252
253
254
255
256
 W X
257
258
259
260
261
262
263
264
265

g the Y-axis cross at the 266

base-case NPV. We
ow. Click on the chart, then Select Layout,
ection (or you can do this more directly by
t, low means left). Now format the X-axis
box you had open when formatting the Y-
se-case value, 1048 in this example.
267
 W X
268
269
270
271
272
273
274
275
276
277
278
279 0
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294

295

296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
 A B C D E F G H
78
79
80 Scenario analysis extends risk analysis in two ways: (1) It allows us to change more than one variable at a
81 time, hence to see the combined effects of changes in several variables on NPV, and (2) It allows us to bring in
82 the probabilities of changes in the key variables.
83
84
85 Figure 11.6 (shown below) presents the cash flows for each scenario (the cash flows are obtained from the 3
86 scenarios' analyses conducted above in the blue, bright yellow, and green boxes). It also shows the NPV for
each scenario. Using the NPV and probability for each scenario, we calculate the expected NPV, the standard
87 deviation, and the coefficient of variation. Later in the analysis we consider the possibility of abandoning the
88 project if the worst case occurs, but our present analysis assumes that we cannot abandon the project.
89
90
91 Figure 11-6
92 Scenario Analysis: Expected NPV and Its Risk (Dollars in Thousands)
93
94 Predicted Cash Flows for Alternative Scenarios
95 Prob: 0 1 2 3 4 r
96 Best → 25% −$10,269 $4,761 $6,673 $8,237 $20,065 10.00%
97
98 1 Base→ 50% −$10,000 $1,900 $2,700 $2,345 $7,800 10.00%
99
100 Worst → 25% −$9,844 $403 $897 −$281 $2,055 10.00%
101 Expected NPV =
102 Standard Deviation (SD) =
103 Coefficient of Variation (CV) = Std. Dev./Expected NPV =
104
105 Probability Distribution of Scenarios:
Outcomes and Probabilities
106
107 50%
108
109
110
111 25% 25%
112
113 Worst-Case Base-Case
114 −$7,543 $1,048 NPV
115 2
Exp. NPV
116 $3,505
117
118
119
120
121
122
123
124
 I J
78
79
80
hange more than one variable at a
81us to bring in
on NPV, and (2) It allows
82
83
84
85 from the 3
he cash flows are obtained
en boxes). It also shows86the NPV for
ulate the expected NPV, the standard
87
ider the possibility of abandoning the
we cannot abandon the88 project.
89
90
91
92
93
94
95 NPV
96 $19,468
97
98 $1,048
99
100 −$7,543
101 $3,505
102 $9,861
103 2.81
104
105
106
107
108
109
110
25%111
112
113
114
2 115NPV
116
117
118
119
120
121
122
123
124
 Worksheet 4-Simulation with 100 Trials
Note: this section is relatively technical and some instructors may choose to skip it with no loss in continuity.

Monte Carlo simulation is similar to scenario analysis in that different values of key inputs are used. Unlike scenario analysis, Monte
Carlo simulation draws a trial set of input values from specified probability distributions and then computes the NPV for this trial. This
process is repeated for hundreds, or even thousands, of trials, with key results (like NPV) saved from each trial. After running the
number of desired trials, the NPVs from the trials can be averaged to estimate the project's expected NPV; the trial results can also be
used to provide a histogram showing the project's possible outcomes.

Panel A, shown in the blue-bordered box below and slightly to the right, shows the inputs from the previous scenario analysis. It also
shows the expected value and standard deviation for those inputs based on the probability of each scenario. To compare apples and
apples, we will assume that the inputs for the simulation analysis are drawn from a normal distribution with the same expected value and
standard deviation as the inputs from the scenario analysis (these are shown in the figure below in the blue section in Columns C and D.
However, any of the input values in Columns C and D may be changed by the user if desired. In addition to the inputs for all the variables
used previously, the inputs section also has an input value for the assumed correlation between units sold in Year 1 and changes in units
sold in later years.

The figure below shows the trial inputs and key results. The inputs used further below in the model are shown in dark red and are drawn
from a normal distribution with the mean and standard deviation specified in Columns C and D. We do this in a 2-step process. Column E
shows a standard normal random variable created with Excel's random number generator. Column F transforms the standard normal
random variable into a normal random variable with the desired mean and standard deviation. To see updated values, hit the F9 key.

Figure 11-7
Inputs and Key Results for the Current Simulation Trial (Dollars in Thousands) Panel A: Values from Scenario Analysis a
Standard Devia
To change an input, change one of the blue values in Columns C or D. To see an updated set of
trial values, hit the F9 key. Inputs and key results will update for the current trial.

Inputs from Scenario Analysis for Comparis

to Simulation
Inputs for Simulation
Probability Random Variables Used in
Current Simulation Trial Base
Distributions
Probability of Scenario
Expected Standard 50%
Value of Deviation of Standard Normal Value Used in
Input Input Random Variable Current Trial
Equipment cost $7,750 $354 0.378 $7,884 $7,750
Salvage value of equip. in Year 4 — — — $639 $639
Opportunity cost — — — $0 $0
Externalities (cannibalization) — — — $0 $0
Units sold, Year 1 10,000 1,061 −0.946 8,997 10,000
% Δ in units sold, after Year 1 15.00% 7.07% −0.779 9.49% 15.00%
Sales price per unit, Year 1 $1.50 $0.18 −0.635 $1.39 $1.50
% Δ in sales price, after Year 1 — — — 4.00% 4.00%
Var. cost per unit (VC), Year 1 $1.07 $0.07 1.487 $1.18 $1.07
% Δ in VC, after Year 1 — — — 3.00% 3.00%
Nonvar. cost (Non-VC), Year 1 $2,120 $148 −1.216 $1,939 $2,120
% Δ in Non-VC, after Year 1 — — — 3.00% 3.00%
Project WACC — — — 10.00% 10.00%
Tax rate 40.00% 7.07% 0.594 44.20% 40.00%
NOWC as % of next year's sales — — — 15.00% 15.00%

Assumed correlation between units

sold in Year 1 and annual change in
units sold in later years:
Assumed correlation between units
sold in Year 1 and annual change in
units sold in later years: r = 65.00% Key Results

Key Results Based on Current Trial Base

NPV −$4,610 $1,048
IRR −10.34% 13.79%
MIRR −6.25% 12.78%
PI 0.53 1.10
Payback Not found 3.39
Discounted payback Not found 3.80

Panel B: Project Analysis for Current Trial in Simulation Using Inputs from Figure 11-7 Column F
Intermediate Calculations 0 1 2 3
Unit sales 8,997 9,851 10,785
Sales price per unit $1.39 $1.44 $1.50
Variable cost per unit (excl. depr.) $1.18 $1.21 $1.25
Nonvariable costs (excl. depr.) $1,939 $1,998 $2,058
Sales revenues = Units × Price/unit $12,485 $14,217 $16,188
NOWCt = 15%(Revenuest+1) $1,873 $2,132 $2,428 $2,765
Basis for depreciation $7,884
Annual depreciation rate (MACRS) 33.33% 44.45% 14.81%
Annual depreciation expense $2,628 $3,504 $1,168
Remaining undepreciated value $5,256 $1,752 $584
Cash Flow Forecast Cash Flows at End of Year
0 1 2 3
Sales revenues = Units × Price/unit $12,485 $14,217 $16,188
Variable costs = Units × Cost/unit $10,572 $11,923 $13,446
Nonvariable costs (excluding depreciation) $1,939 $1,998 $2,058
Depreciation $2,628 $3,504 $1,168
Earnings before interest and taxes (EBIT) −$2,655 −$3,208 −$483
Taxes on operating profit (40% rate) −$1,173 −$1,418 −$213
Net operating profit after taxes −$1,481 −$1,790 −$269
Add back depreciation $2,628 $3,504 $1,168
Equipment purchases −$7,884
Salvage value
Cash flow due to tax on salvage value (40% rate)
Cash flow due to change in WC −$1,873 −$260 −$296 −$337
Opportunity cost, after taxes $0 $0 $0 $0
After-tax cannibalization or complementary effect $0 $0 $0
Project net cash flows: Time Line −$9,756 $887 $1,418 $561
Project Evaluation Measures
NPV -$4,610
IRR -10.34%
MIRR -6.25%
Profitability index 0.53
Payback #VALUE!
Discounted payback #VALUE!
Calculations for Payback Year: 0 1 2 3
Cumulative cash flows for payback -$9,756 -$8,870 -$7,451 -$6,890
Discounted cash flows for disc. payback -$9,756 $806 $1,172 $422
Cumulative discounted cash flows -$9,756 -$8,950 -$7,778 -$7,357
How the Simulation Works

We use a Data Table to perform the simulation (the Data Table is below shaded in lavender). When the Data Table is updated, it will
insert new random variables for each of the inputs we allow to change in Figure 11-7 above, run the analysis in Panel B above, and then
save the NPV for each trial. (We also save the input variables for each trial so that we can verify that they are behaving as we expect.) We
set the first column of the Data Table (the variable to be changed in each row) to numbers from 1-100. We don't really use these numbers
anywhere in the analysis, but if we tell the Data Table to treat these as the Column inputs, Excel will recalculate all items in the Data
Table, including the random inputs and the resulting NPV. In other words, we "trick" Excel into doing a simulation. We tell Excel to insert
each of the Column inputs in the Data Table into the cell immediately below this box. This cell isn't linked to anything else, but each time
Excel updates a row of the Data Table, all the random values will be updated.

Column input cell to "trick" Excel into updating random variables in Data Table: 1 Don't change the red cell.

Excel normally updates all values in a Data Table each time any cell that is related to the Data Table changes. In our case, we have random
variables in the Data Table, so each time any cell in the worksheet makes a calculation, the Data Table is updated. If the Data Table has
many rows, updating it can take up to 20 or 30 seconds. This is ok when we want to update the Table, but it is annoying to wait 30 seconds
any time we make any changes in the worksheet. The "check box" explained below helps with this annoyance.

To put random variables in the Data Table for the simulation, the box shown below must be checked; otherwise, the Data Table contains
only zero's and doesn't update when the sheet makes a calculation (other than the first time you check this box or if you insert or delete
rows or columns). If the box is unchecked and you check it, the check mark won't show up until the Table is updated, so don't get
impatient and click it twice. After you have checked the box, the Data Table will update any time you change a cell in the worksheet. So to
make the Data Table update, make sure the box is checked and then hit the F9 key.

Put a check in the box below to put trials into

the data table; otherwise, the data table will
have only zeros.

✘ Must be checked to put random variable in data table for simulation

1

Remember to uncheck the box above when you are through with the simulation, or the Data Table will recalculate any time you make a
change in the worksheet, which will slow down all other calculations in the worksheet.

You don't need to change anything in this section. It will be updated automatically if you do a simulation. The summary of the simulation
results and the histogram are based on the simulation trials in the Data Table below and are updated automatically when you do a
simulation.

Note: If results are all zeros, go back to row 144 and "check" the box by clicking it with your cursor.
Figure 11-8
Summary of Simulation Results (Thousands of Dollars)
Number of Trials 100 Input Variables

Nonvariable
Annual change in Sales price Variable cost cost
Summary Statistics for Equipment Units sold, units sold, after per unit, per unit (Non-VC),
Simulated Input Variables cost Year 1 Year 1 Year 1 (VC), Year 1 Year 1
Average $7,884 8,997 15% $1.50 $1.07 $2,118
Standard deviation $0 0 7% $0.19 $0.07 $147
Maximum $7,884 8,997 33% $2.07 $1.25 $2,521
Minimum $7,884 8,997 −7% $1.02 $0.88 $1,776
Correlation with unit sales 0%
Summary Statistics for Simulated
Results NPV
 Average $1,360
Standard deviation $5,080
Maximum $15,898
Minimum −$9,497
Median $569
Probability of NPV > 0 54.0%
Coefficient of variation 3.73

Probability

98 63 27 92 56 20 85 49 14 78 42 07 71 36 $0 136 271 407 542 678 814 949 085 220 356 492 627 763 898
,8 4,7 3,6 2,4 1,3 0,2 9,0 7,9 6,8 5,6 4,5 3,4 2,2 1,1 , , , , , , , , , , , , , ,
5
1 1 1 1 1 1 -$ -$ -$ -$ -$ -$ -$ -$ $1 $2 $3 $4 $5 $6 $7 $9 $10 $11 $12 $13 $14 $15
-$ -$ -$ -$ -$ -$ NPV ($)

Output of Simulation in Data Table

% Δ in units Var. cost per Nonvar. cost

Units sold, sold, after Sales price per unit (VC), (Non-VC),
Trial Number Equipment cost Year 1 Year 1 unit, Year 1 Year 1 Year 1 Tax rate
7883.518973905 8996.79136 0.09490281 1.3877116730933 1.175136216 1939.464505 0.4419999255
1 7883.518973905 8996.79136 0.1420421 1.5787106005512 1.0441462647 1963.396549 0.3108677395
2 7883.518973905 8996.79136 0.14931465 1.2477287257576 1.064866026 2277.896991 0.4155458568
3 7883.518973905 8996.79136 0.16154589 1.5216813431999 1.0768561522 1922.76912 0.3474599283
4 7883.518973905 8996.79136 0.12627835 1.6155528545939 1.2050355083 2193.28571 0.3743301114
5 7883.518973905 8996.79136 0.15009629 1.3628428836881 1.0836792559 2241.54119 0.3663700064
6 7883.518973905 8996.79136 0.20248128 1.3878133909216 1.0815093923 2174.78286 0.4169587264
7 7883.518973905 8996.79136 0.16998607 1.6226550974745 1.2525853608 2259.09568 0.4004912045
8 7883.518973905 8996.79136 0.14355754 1.3603673722689 1.0566135672 2154.084471 0.4390245037
9 7883.518973905 8996.79136 0.2283007 1.5080718412769 1.0900741442 2421.084026 0.3605822715
10 7883.518973905 8996.79136 0.17662921 1.7124143109414 1.1857019299 2070.613577 0.4739835448
11 7883.518973905 8996.79136 0.15739532 1.2839959946781 0.9481038448 2333.108361 0.3373496415
12 7883.518973905 8996.79136 0.11719304 1.3929993866009 1.0148757458 2104.866798 0.3388362527
13 7883.518973905 8996.79136 0.1964211 1.545311542073 1.1480571285 1991.106445 0.2888527279
14 7883.518973905 8996.79136 0.25851676 1.5535109607165 0.9780582188 1950.977439 0.3473400457
15 7883.518973905 8996.79136 0.20896875 1.4234502689645 0.8994814498 1991.696923 0.3975152649
16 7883.518973905 8996.79136 0.2367254 1.7672534073683 1.0705418589 2010.80287 0.4720737705
17 7883.518973905 8996.79136 0.24823933 1.4749803896211 1.0404218079 2161.112231 0.3653985155
18 7883.518973905 8996.79136 0.05090946 1.5446306515626 1.0991846023 2378.092311 0.6405265993
19 7883.518973905 8996.79136 0.1116062 1.0187424515165 1.107825529 2090.543876 0.5186023406
20 7883.518973905 8996.79136 0.15711975 1.4473104909251 1.2136490031 2231.234371 0.3519072548
21 7883.518973905 8996.79136 0.111914 1.5587277395481 1.2041413495 1991.73542 0.550773952
22 7883.518973905 8996.79136 0.32896343 1.3343293553344 1.1149919878 2063.193592 0.4453084264
23 7883.518973905 8996.79136 0.30474529 1.6544106862867 1.0966201758 1941.612973 0.4413131844
24 7883.518973905 8996.79136 0.17734804 1.7875370468963 0.980646446 1965.067895 0.3221572507
25 7883.518973905 8996.79136 0.06081339 1.3550211570055 1.1373456715 2132.845589 0.4118997824
26 7883.518973905 8996.79136 0.21036922 1.4031641777143 0.9651474833 2068.95086 0.369500451
27 7883.518973905 8996.79136 0.12849263 1.9875690549823 1.0796372279 2520.660332 0.4150737733
28 7883.518973905 8996.79136 0.1397609 1.3937340789139 1.1177908732 2286.311546 0.31452393
29 7883.518973905 8996.79136 0.12503544 1.3514572355417 0.9539358336 2053.006239 0.3895756526
30 7883.518973905 8996.79136 0.29189181 1.4873021369488 1.0348280758 2014.777441 0.2372455642
31 7883.518973905 8996.79136 0.23502038 1.6543790021582 1.0912693 1817.823253 0.3998104482
32 7883.518973905 8996.79136 0.2472863 1.244451802225 1.1074310597 1951.276835 0.472478173
33 7883.518973905 8996.79136 0.25001127 1.1953042796606 1.0847366669 2082.451894 0.3202718609
34 7883.518973905 8996.79136 0.08747296 1.3264008054844 1.0578224748 2366.181665 0.3809385883
35 7883.518973905 8996.79136 0.1386178 1.703906695876 1.0737348608 2184.347781 0.4126623359
36 7883.518973905 8996.79136 0.13122619 1.2578105891067 1.0900127649 2167.774689 0.3930822148
37 7883.518973905 8996.79136 0.03773266 1.7062631993997 1.1114276436 2293.991879 0.5079126507
38 7883.518973905 8996.79136 0.088499 2.0022914718397 1.1982617642 2112.085279 0.4030584937
39 7883.518973905 8996.79136 0.1505147 1.2450843014716 0.8759393024 1926.481816 0.4840317799
40 7883.518973905 8996.79136 0.29520453 1.1695929176024 1.0777494277 2261.158394 0.4890279181
41 7883.518973905 8996.79136 0.08195723 1.3466902263516 0.9585896623 2001.59615 0.5241806768
42 7883.518973905 8996.79136 0.07440492 1.4666206130766 1.0304541983 2029.501127 0.3911039844
43 7883.518973905 8996.79136 0.1625451 1.3896439360197 1.0964124343 2185.791445 0.4173944992
44 7883.518973905 8996.79136 0.01929067 1.569814616154 1.0101049665 2189.596798 0.3447763301
45 7883.518973905 8996.79136 0.25055893 1.6975072982083 1.1663832852 2071.486622 0.4987270352
46 7883.518973905 8996.79136 0.05450259 1.4623070906845 1.0649232826 2343.717293 0.4343698313
47 7883.518973905 8996.79136 0.14218617 1.3917580231893 1.0285333109 2186.454614 0.5285365884
48 7883.518973905 8996.79136 0.16005064 1.684895633943 1.1602303722 1980.746767 0.3763029102
49 7883.518973905 8996.79136 0.21268592 1.5079302748094 1.0854024233 2060.418344 0.3551047303
50 7883.518973905 8996.79136 0.13860683 1.5705200563097 1.0216061669 2097.540351 0.4723607174
51 7883.518973905 8996.79136 0.21238064 1.6021796535889 1.0548907579 1888.451775 0.3114162041
52 7883.518973905 8996.79136 0.2184462 1.3944539901437 1.0837698904 2317.175328 0.393741006
53 7883.518973905 8996.79136 0.00767031 1.5627692623307 1.028177361 1828.146127 0.4708507536
54 7883.518973905 8996.79136 0.18126041 1.4425898461503 1.1131739957 1938.124096 0.3546700352
55 7883.518973905 8996.79136 0.21380393 1.2399642860057 0.9753319163 2156.364513 0.3520107715
56 7883.518973905 8996.79136 0.06288901 1.4688648244817 1.1928299633 2299.984477 0.3096485961
57 7883.518973905 8996.79136 0.09981821 1.4106136950167 1.0278039592 2176.328298 0.2995146062
58 7883.518973905 8996.79136 0.18138169 1.7760509517109 1.1640457276 2167.207354 0.37533801
59 7883.518973905 8996.79136 0.20585526 1.4189510195574 1.2098178589 1923.631201 0.3792222317
60 7883.518973905 8996.79136 0.09735935 1.569541840724 1.0374380587 2137.109769 0.4254838035
61 7883.518973905 8996.79136 0.19834809 1.4253349239542 1.0269693824 2306.002544 0.4800800577
62 7883.518973905 8996.79136 0.14279601 1.3993381967808 1.0795766173 2117.033911 0.2121877053
63 7883.518973905 8996.79136 0.17051419 1.2780322005036 1.0315290793 1951.121331 0.3853506936
64 7883.518973905 8996.79136 0.14296509 1.6716908781442 1.0147970591 2201.557248 0.3939036391
65 7883.518973905 8996.79136 0.11358552 1.2295264964419 1.0570481361 2226.468662 0.254524626
66 7883.518973905 8996.79136 0.09056677 1.1457906719938 1.039638345 2113.884665 0.3674073811
67 7883.518973905 8996.79136 0.15410668 1.4344084713471 1.0842221352 2064.068534 0.3888237139
68 7883.518973905 8996.79136 0.18393083 1.6908763630752 1.0845894428 2066.243918 0.4418613437
69 7883.518973905 8996.79136 0.05193737 1.2419408874673 1.0977791151 2112.569997 0.3350771425
70 7883.518973905 8996.79136 0.13555676 1.7280556195727 1.0524805539 2092.367339 0.4683618906
71 7883.518973905 8996.79136 0.0721799 1.4846238938998 1.0525152708 1821.027228 0.5177281101
72 7883.518973905 8996.79136 0.09346232 1.5707443606273 1.0736987771 2169.58197 0.4218535968
73 7883.518973905 8996.79136 0.12518278 1.5240478213088 1.0839785971 2014.616816 0.4081508227
 74 7883.518973905 8996.79136 0.13152008 1.3840295734295 1.1241528686 1981.423323 0.3716137443
75 7883.518973905 8996.79136 0.19727662 1.4584626816479 0.9474072956 1840.393725 0.2964036674
76 7883.518973905 8996.79136 0.22793421 1.4324880750769 0.9991137414 2113.443209 0.3565659864
77 7883.518973905 8996.79136 0.1890256 1.6363984511709 1.0713868924 2124.413336 0.4557078529
78 7883.518973905 8996.79136 0.08177943 1.7047953418492 1.0716979782 2111.21061 0.3309349157
79 7883.518973905 8996.79136 0.15679047 1.7140637215794 1.0170596 2162.086384 0.4344721757
80 7883.518973905 8996.79136 0.21860652 1.4552195799111 1.1026359315 2196.590941 0.3698645905
81 7883.518973905 8996.79136 -0.00150848 1.5670676601217 1.1134175653 2025.046128 0.2544604785
82 7883.518973905 8996.79136 0.22401256 1.7370833723143 1.0386986827 2235.110005 0.4443019968
83 7883.518973905 8996.79136 0.08857638 1.5339847200982 0.9960621411 2280.871592 0.3546566708
84 7883.518973905 8996.79136 0.06256523 1.4428373751715 1.1038201309 1989.072079 0.2643078787
85 7883.518973905 8996.79136 0.21012344 1.4828080499025 0.9809937268 2237.518992 0.3619575549
86 7883.518973905 8996.79136 0.14336869 1.518746432885 1.0587063507 2174.272715 0.4039546029
87 7883.518973905 8996.79136 0.07038603 1.8708997564615 0.9424688891 2133.138617 0.401204081
88 7883.518973905 8996.79136 0.09917383 1.8053353734841 0.9660107844 1932.317179 0.490314752
89 7883.518973905 8996.79136 0.24404938 1.6350806813397 1.0920659657 2285.889287 0.5036388537
90 7883.518973905 8996.79136 0.15913026 1.5464333703187 1.0293986432 2002.170252 0.3688266224
91 7883.518973905 8996.79136 -0.06773958 1.2204185027457 1.0491607308 2116.076664 0.3672236331
92 7883.518973905 8996.79136 0.0718194 1.4380566564793 1.0777742298 2246.35596 0.4260104941
93 7883.518973905 8996.79136 0.1188379 2.0706855930415 1.0068249616 2359.497061 0.3965225672
94 7883.518973905 8996.79136 0.21937455 1.6321631854243 1.1070590634 2104.599339 0.3365924098
95 7883.518973905 8996.79136 0.16982433 1.6507326875989 0.9976104423 2118.777441 0.2988541372
96 7883.518973905 8996.79136 0.31098856 1.5145154478672 1.1851780296 1775.801499 0.4477179786
97 7883.518973905 8996.79136 0.07638152 1.369112382507 0.9811793161 2021.667027 0.3036637762
98 7883.518973905 8996.79136 0.20129794 1.2904483880195 1.0856289852 2391.374048 0.4139696532
99 7883.518973905 8996.79136 0.18195401 1.5595587581112 0.9504944914 2190.036624 0.4162757732
100 7883.518973905 8996.79136 0.14967799 1.3996675913852 1.0367657772 2296.907068 0.3809011551
 7/24/2013

scenario analysis, Monte

the NPV for this trial. This
ial. After running the
e trial results can also be

scenario analysis. It also

To compare apples and
the same expected value and
section in Columns C and D.
e inputs for all the variables
Year 1 and changes in units

wn in dark red and are drawn

n a 2-step process. Column E
rms the standard normal
ed values, hit the F9 key.

Panel A: Values from Scenario Analysis and Their Expected Values and
Standard Deviations
Note: These are the fixed values from the simulation that is s
Figure 11-7
Inputs and Key Results for the Current Simulation Trial (Dollars in Thousan
To change an input, change one of the blue values in Columns C or D. To see
trial values, hit the F9 key. Inputs and key results will update for the current

Inputs from Scenario Analysis for Comparison

to Simulation

Inputs for Simulation

Worst Best Probability Distributions
Standard
Expected Value Deviation
Probability of Scenario of Input
of Input
25% 25% Expected
Value of
Input
$8,250 $7,250 $7,750 $354 Equipment cost $7,750
$639 $639 Salvage value of equip. in Year 4 —
$0 $0 Opportunity cost —
$0 $0 Externalities (cannibalization) —
8,500 11,500 10,000 1,061 Units sold, Year 1 10,000
5.00% 25.00% 15.00% 7.07% % Δ in units sold, after Year 1 15.00%
$1.25 $1.75 $1.50 $0.18 Sales price per unit, Year 1 $1.50
4.00% 4.00% % Δ in sales price, after Year 1 —
$1.17 $0.97 $1.07 $0.07 Var. cost per unit (VC), Year 1 $1.07
3.00% 3.00% % Δ in VC, after Year 1 —
$2,330 $1,910 $2,120 $148 Nonvar. cost (Non-VC), Year 1 $2,120
3.00% 3.00% % Δ in Non-VC, after Year 1 —
10.00% 10.00% Project WACC —
50.00% 30.00% 40.00% 7.07% Tax rate 40.00%
15.00% 15.00% NOWC as % of next year's sales —

Assumed correlation between units

sold in Year 1 and annual change in
units sold in later years:
 Assumed correlation between units
sold in Year 1 and annual change in
units sold in later years: r =
Worst Best Key Results Based on Current Trial
-$7,543 $19,468 NPV NPV ###
-171.46% 62.41% IRR IRR 53.23%
-22.23% 43.49% MIRR MIRR 37.61%
0.23 2.90 PI PI 2.45
Not found 1.83 Payback Payback 1.98
Not found 2.07 Discounted payback Discounted payback $2.25

4
11,809
$1.56
$1.28
$2,119
$18,434
$0

7.41%
$584
$0
at End of Year
4
$18,434
$15,164
$2,119
$584
$566
$250
$316
$584

$639
−$282
$2,765
$0
$0
$4,022

4
-$2,868
$2,747
-$4,610

Table is updated, it will
in Panel B above, and then
behaving as we expect.) We
on't really use these numbers
ate all items in the Data
ation. We tell Excel to insert
anything else, but each time
Don't change the red cell.
In our case, we have random
ated. If the Data Table has
s annoying to wait 30 seconds
e.
ise, the Data Table contains
ox or if you insert or delete
updated, so don't get
a cell in the worksheet. So to
ulate any time you make a
e summary of the simulation
atically when you do a
ur cursor.
Tax rate
39.5%
7.3%
64.1%
21.2%
Simulation control, check boxes, and forms
You might wonder "what's the deal about this check box and why does it work this way?" There are 2 parts to this question: Why
useful for the simulation and how do you use a check box for it? Let's answer the "why it is useful for a simulation" question first
talk about check boxes. This check box is linked to cell B144. If you click on the box, B144 returns a "TRUE" value, and if the box i
unchecked then it returns a "FALSE" value. The reason you can't see anything in B144 is because we made the font color the sam
the background color so it wouldn't be distracting. Below, here's what is in cell B144:
1
See, it reads either True or False, depending on whether the box is checked or not. The formulas in the simulation data table in c
B206 to I206 use this value to determine whether or not the data table should be evaluated. For example, the formula in B206 is
=IF($B$144,F38,0). If B144 is TRUE, then the cell returns the value in F38, which is the simulated equipment cost. If B144 is FAL
then it returns 0. The other formulas in that row are similar. The end result is that if B144 is FALSE, then the data table has no
formulas to evaluate (everything is zero) and if it is TRUE, then it has formulas to evaluate and it records the simulation results. Y
didn't really need a check box; you could just as well have left B144 visible and either put a 1 or a 0 in it, and had the IF statemen
row 206 check, instead, for whether B144 is equal to 1. But the check box is neat.
Now for how to use Forms in Excel. To insert a check box in Excel 2010 you must first enable the Developer tab on your Ribbon.
These are instructions for Excel 2010 For later versions of Excel you can find instructions for this by searching on "check box" in
Excel help. Click the File tab, then click Options, then click Customize Ribbon. Under Customize the Ribbon and under Main Tabs,
select the Developer check box.
On the Developer tab, in the Controls group, click on Insert and then, in the Form Controls section, click on Insert (the picture tha
a tool box). Look at the Forms Control section and click on the icon that looks like a check mark. Move your cursor to where you'd
the check box to go, and click there. A name, like Check Box 25, will show up next to the box. Right click on the check box and clic
Format Control. Then under the Control tab, make sure the "unchecked" button is pressed, then put in a cell reference in the Cell
box. We had $B$144 in that box. Suppose you put in $P$167 for your box. You are mostly done! Now when you click on the check
cell P167 will display TRUE and when it is not checked, P167 will display FALSE. You can use these two logical values in your Exc
programming. All that is left is to put in a useful description for the check box. You don't want your users to be confused about w
the box is for. Just click on the check box area and edit the name to be something like "Click this box if you want something specia
happen to the spreadsheet" (like enable the data table to do its calculations!).
Note: These are the fixed values from the simula
Figure 11-8
Summary of Simulation Results (Thousands of Dollars)
Number of Trials 10,000
Summary Statistics for
Simulated Input Variables
Average
Standard deviation
Maximum
Minimum
Scratch work for chart: see comments. Correlation with unit sales
Count Summary Statistics for
Range bottom 0 Percent Simulated Results
 -$15,898 0 0% Average
-$14,763 0 0% Standard deviation
-$13,627 0 0% Maximum
-$12,492 0 0% Minimum
-$11,356 0 0% Median
-$10,220 1 1% Probability of NPV > 0
-$9,085 0 0% Coefficient of variation
-$7,949 3 3%
-$6,814 3 3%
-$5,678 5 5%
-$4,542 5 5%
-$3,407 7 7%
-$2,271 15 15%
-$1,136 7 7%
$0 9 9%
$1,136 4 4%
$2,271 3 3%
$3,407 9 9%
$4,542 6 6%
$5,678 9 9%
$6,814 3 3%
$7,949 3 3%
$9,085 4 4%
$10,220 1 1%
$11,356 1 1%
$12,492 1 1%
$13,627 0 0%
6 2 7 3 8
35 49 62 76 89 $14,763 0 0%
1, 12, 13, 14, 15,
$ $ $ NPV $ ($) $15,898 1 1%
Sum 100 100%

NPV
-4609.6089583
7293.9358816
-5064.6014455
2520.4298325
-648.89632841
-2235.7370777
-203.56391914
1176.7618083
-1400.4308327
1706.4646888
4368.1975078
-1244.2259678
-1529.2919783
2776.339347
9373.8322612
4286.3748884
10971.811708
 4133.1864067
-1269.3507562
-9496.7386742
-4318.5886017
-1695.1102387
-982.27499574
7911.7051665
15898.357117
-4988.4801194
3784.2534994
11481.280192
-2641.2236345
218.47553727
5957.9077767
8139.6029801
-4577.9192598
-6208.6250898
-4411.1563909
6132.0299778
-4611.4558469
-574.84073381
7056.4150298
-403.46835242
-5841.2787919
-1269.5840574
-1696.6876951
-1725.2255645
899.75455858
5691.198119
-3438.6453138
-902.94949995
4294.8004861
1513.5690047
3892.267172
9271.1069084
-230.70819079
-1275.9426036
552.67035055
-1262.2525094
-5195.0718076
-1505.2459197
8432.8539799
-4167.820702
125.80099221
586.05952606
-2333.3497356
-2917.4651532
5866.7663355
-6435.7095657
-7646.2990517
-1874.8472239
4943.2597581
-7072.3542113
4450.9947254
892.1883016
237.5528308
1084.9271179
-3232.9031533
6307.9110597
4695.5085858
6068.6363969
4334.5720367
5801.2249248
1305.0335912
-2309.957137
9633.9053261
4484.4149664
-3336.7812621
5059.4179738
2394.5621987
9158.9211614
5781.7396628
5388.7916447
4708.016786
-7504.7522497
-2509.8729669
12904.208014
5632.4621487
8803.110963
1130.1422085
-1259.6011035
-3971.2554068
6115.8766496
-2178.572522
values from the simulation that is shown in the textbook.

urrent Simulation Trial (Dollars in Thousands)

of the blue values in Columns C or D. To see an updated set of

s and key results will update for the current trial.

Inputs for Simulation Random Variables Used in

Probability Distributions Current Simulation Trial

Standard
Deviation of Standard Normal Value Used in
Input Random Variable Current Trial
$354 −0.165 $7,692
— — $639
— — $0
— — $0
1,061 −0.069 9,927
7.07% 0.734 20.19%
$0.18 1.931 $1.84
— — 4.00%
$0.07 −1.087 $0.99
— — 3.00%
$148 0.514 $2,196
— — 3.00%
— — 10.00%
7.07% −1.511 29.32%
— — 15.00%
65.00%
nd forms

s way?" There are 2 parts to this question: Why it is

"why it is useful for a simulation" question first, then
x, B144 returns a "TRUE" value, and if the box is
B144 is because we made the font color the same as
144:

. The formulas in the simulation data table in cells

evaluated. For example, the formula in B206 is
is the simulated equipment cost. If B144 is FALSE,
t if B144 is FALSE, then the data table has no
evaluate and it records the simulation results. You
ther put a 1 or a 0 in it, and had the IF statements in

first enable the Developer tab on your Ribbon.

ructions for this by searching on "check box" in
er Customize the Ribbon and under Main Tabs,

Controls section, click on Insert (the picture that like

a check mark. Move your cursor to where you'd like
to the box. Right click on the check box and click on
pressed, then put in a cell reference in the Cell link
mostly done! Now when you click on the check box,
You can use these two logical values in your Excel
u don't want your users to be confused about what
ike "Click this box if you want something special to

are the fixed values from the simulation that is shown in the textbook.

ulation Results (Thousands of Dollars)

Input Variables

Sales Variable
% Δ in units price per cost per Nonvar. cost
sold, after unit, unit (VC), (Non-VC),
Equip. cost Units sold, Year 1 Year 1 Year 1 Year 1 Year 1 Tax rate
$7,750 9,982 15.0% $1.50 $1.07 $2,122 39.9%
$354 1,057 7.1% $0.18 $0.07 $150 7.1%
$9,072 14,005 45.0% $2.15 $1.32 $2,682 68.7%
$6,397 6,172 −13.97% $0.81 $0.78 $1,549 13.5%
65.4%

1.2 Probability
NPV

0.8

0.6
 1.2 Probability

$1,120
1
$5,132
$26,406 0.8
−$16,785
$737 0.6
56.4%
4.58 0.4

0.2

0
1
NPV ($)
 Appendix 11A

DEPRECIATION TABLES

Depreciation percentages personal property (i.e., assets other

than real estate), as stated in IRS i4562. Actual IRS Depreciation Percentages fo
Class of Investment Class of Inves
Ownersh Ownership
ip Year 3-Year 5-Year 7-Year 10-Year Year 3-Year 5-Year

1 33.33% 20.00% 14.29%

10.00% 1 33.33% 20.00%
2 44.45% 32.00% 24.49%
18.00% 2 44.45% 32.00%
3 14.81% 19.20% 17.49%
14.40% 3 14.81% 19.20%
4 7.41% 11.52% 12.49%
11.52% 4 7.41% 11.52%
5 11.52% 8.93%
9.22% 5 11.52%
6 5.76% 8.92%
7.37% 6 5.76%
7 8.93%
6.55% 7
8 4.46%
6.55% 8
9 6.56% 9
10 6.55% 10
11 3.28% 11
100.00% 100.00% 100.00% 100.00% 12
13
14
15
16
17
18
19
20

100.00% 100.00%

MACRS for Residential Real Property

Month Property Placed in Service

Year 1 2 3 4 5 6 7 8
1 3.485% 3.182% 2.879% 2.576% 2.273% 1.970% 1.667% 1.364%
2-27 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636% 3.636%
28 1.970% 2.273% 2.576% 2.879% 3.182% 3.458% 3.636% 3.636%
29 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.152% 0.455%
99.99% 99.99% 99.99% 99.99% 99.99% 99.96% 99.99% 99.99%
MACRS for Nonresidential Real Property
Month Property Placed in Service
Year 1 2 3 4 5 6 7 8
1 2.461% 2.247% 2.033% 1.819% 1.605% 1.391% 1.177% 0.963%
2-39 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564% 2.564%
40 0.107% 0.321% 0.535% 0.749% 0.963% 1.177% 1.391% 1.605%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Rounded Percentages Used in Analysis

Property Life (in years): 39
Depreciation in Year 1 (assuming half-year convention): 1.30%
Rounded Depreciation in Years 2-39: 2.60%
Depreciation in Year 40: 1.30%
 7/24/2013

RS Depreciation Percentages for Personal Property

Class of Investment

7-Year 10-Year 15-Year 20-year

14.29% 10.00% 5.00%

3.750%
24.49% 18.00% 9.50%
7.219%
17.49% 14.40% 8.55%
6.677%
12.49% 11.52% 7.70%
6.177%
8.93% 9.22% 6.93%
5.713%
8.92% 7.37% 6.23%
5.285%
8.93% 6.55% 5.90%
4.888%
4.46% 6.55% 5.90%
4.522%
6.56% 5.91%
4.462%
6.55% 5.90%
4.461%
3.28% 5.91%
4.462%
5.90%
4.461%
5.91%
4.462%
5.90%
4.461%
5.91%
4.462%
2.95%
4.461%
4.462%
4.461%
4.462%
4.461%
2.231%
100.00% 100.00% 100.00% 100.00%

n Service
9 10 11 12
1.061% 0.758% 0.455% 0.152%
3.636% 3.636% 3.636% 3.636%
3.636% 3.636% 3.636% 3.636%
0.758% 1.061% 1.364% 1.667%
99.99% 99.99% 99.99% 99.99%
n Service
9 10 11 12
0.749% 0.535% 0.321% 0.107%
2.564% 2.564% 2.564% 2.564%
1.819% 2.033% 2.247% 2.461%
100.00% 100.00% 100.00% 100.00%
 -110000

1 19000

2 19000

3 19000

4 19000

5 19000

6 19000

7 19000

8 19000

9 19000

10 19000
$6,746.78
Dep
 0 1 2 3

dep rates 0.3333 0.4445 0.1481

Depr.

cost

WC

After Tax
Savings_Labour

DTS

After Tax
Salvage

TOTAL
Savings
c
 0 0

cost 150,000

units produced

SP/unit

Cost/unit

Profit

After Tax Profit

 0 1 2 3
Depr Rate 20.00 32.00 19.20
Depreciation_New 2,400 3,840 2,304
Depreciation_old 650 650 650
Difference 1,750 3,190 1,654
DTS 700 1,276 662

Cost (8,080)
DTS 700 1,276 662
Salvage_New
After Tax Profit 2,340 2,340 2,340
Change in Wc (2,200)
Salvage_Old_Opp
cost
TOTAL (10,280) 3,040 3,616 3,002

NPV 2,093
 4 5 6
11.52 11.52 5.76
1,382 1,382 691 13,382
650 650 325
732 732 366
293 293 146

293 293 146

900
2,340 2,340 2,340
2,200

(480)
2,633 2,633 5,106
Equipment cost 10,000,000 Key Results:

Net operating working capital/Sales10% OF Sales1 NPV =

First year sales (in units) 1,000 IRR =

Sales price per unit 24,000 Payback =

Variable cost per unit (excl. depr.) 17,500

Nonvariable costs (excl. depr.) 1,000,000

Estimated salvage value at year 4 500,000

Tax rate 40%

WACC 8%

Inflation in prices and costs 3%

Intermediate Calculations 0 1 2

Units sold 1,000 1,000

Sales price per unit (excl. depr.) $24,000.00 $24,720.00

Variable costs per unit (excl. depr.) $17,500.00 $18,025.00

Nonvariable costs (excl. depr.) 1,000,000 1,000,000

Sales revenue $24,000 $24,720

Required level of net operating working capital $2,400 $2,472 $2,546

Base for depreciation $10,000

Annual equipment depr. rate 20.00% 32.00%

Annual depreciation expense $2,000 $3,200

Ending Bk Val: Cost – Accum Dep'rn $1,728

Salvage value 500

Profit (or loss) on salvage ($1,228)

Tax on profit (or loss) ($491.20)

Net cash flow due to salvage 991

Years
Cash Flow Forecast 0 1 2
Sales revenue $24,000 $24,720
Variable costs 17,500 18,025
Nonvariable operating costs 1,000 1,030
Depreciation (equipment) 2,000 3,200
Oper. income before taxes (EBIT) $3,500 $2,465
Taxes on operating income (40%) 1,400 986
Net operating profit after taxes $2,100 $1,479
Add back depreciation 2,000 3,200
Equipment purchases -$10,000
Cash flow due to change in NOWC -$2,400 -$72 -$74
Net cash flow due to salvage
Net Cash Flow (Time line of cash flows) -$12,400 $4,028 $4,605
 3 4

1,000 1,000

$25,461.60 $26,225.45

$18,565.75 $19,122.72

1,000,000 1,000,000

$25,462 $26,225

$2,623 $0

19.20% 11.52%

$1,920 $1,152

3 4
$25,462 $26,225
18,566 19,123
1,061 1,093
1,920 1,152
$3,915 $4,858
 1,566 1,943
$2,349 $2,915
1,920 1,152

-$76 $2,623
$991
$4,193 $7,680
 1 2 3 4
Dep Rate 0.3333 0.4445 0.1481 0.0741
Depr 116655 155575 51835 25935

cost -350000
cost savings after tax 66000 66000 66000 66000
DTS 46662 62230 20734 10374
WC -35000
after tax salvage

TOTAL -385000 112662 128230 86734 76374

NPV $15,732
 5

66000
0
35000
19800

120800
 p Cost Savings dev Sq Salvage
Worst 0.35 88,000 152,883,500 28,000
Base 0.35 110,000 423,500 33,000
Best 0.3 132,000 160,083,000 38,000
108,900 313,390,000 32750
Expected Value 108,900 17703

1 2 3 4
Dep Rate 0.3333 0.4445 0.1481 0.0741
Depr 116655 155575 51835 25935

cost -350000
cost savings after tax 52800 52800 52800 52800
DTS 46662 62230 20734 10374
WC -40000
after tax salvage

TOTAL -390000 99462 115030 73534 63174

NPV ($38,065)
 de sq WC dev sq
7,896,875 40000 7896875
21,875 35000 21875
8,268,750 30000 8268750
16,187,500 35250 16187500
4023 4023

52800
0
40000
16800

109600
 1 2 3 4
Dep Rate 0.3333 0.4445 0.1481 0.0741
Depr 116655 155575 51835 25935

cost -350000
cost savings after tax 79200 79200 79200 79200
DTS 46662 62230 20734 10374
WC -30000
after tax salvage

TOTAL -380000 125862 141430 99934 89574

NPV $69,528
 npv dev sq
5 worst 0.35 -38065 914168541
base 0.35 15732 2532917
best 0.3 69528 957205543
1873907001
expected npv 13041.85
79200 SD NPV 43289
0 CV 3.32
30000
22800

132000
 p CF_A CF_B dev sq_A dev sq_B
0.2 6000 0 112500 11704500
0.6 6750 6750 0 486000
0.2 7500 18000 112500 21424500
A Exp return 6750 7650 225000 33615000

SD 474 5798

CV 0.07 0.76

NPV $10,036.25 $11,624.01

npv p npv*p

881718 0.24 211612.32

-185952 0.24 -44628.48
-376709 0.12 -45205.08
-10000 0.4 -4000
exp npv 117778.76