Gestión Financiera S2G2

Excel master class: Investment Decision Making

Bogota, Colombia. 2021

ABC company core business is about sell microprocessors for quantum computers. ABC company plans to create a new microprocessor
requirements. For this, ABC has decided that the best alternative between two (buy or make) is to make the microprocessors and the opp
decision is $100K. The cost by investment in PPE (property, plant and equipment) is $8 M EUR. The project will require working capital a
microprocessor is sold by $20K and the variable cost per unit is $14,5K. Considering that ABC is located in Germany, the average countr
is 1.5%. Fixed costs amount are $800K per year.

Considering that microprocessors have a life cycle of 8 years, the company will produce them only for the next 4 years. Additionally, proje
correlated with company assets returns. The firm expects to sell 1,000 units per year.

The PPE is depreciated over a 5 years basis period. The PPE market value in 4 years is estimated on $800K. ABC's tax rate is 35%. Its c
average risk, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a cost of
with 13%.

A. Calculate the cash flow projection

Helper calculus (input)

PPE investment $8,000
WK required as a % of sales 12%
Sales for the 1st year (in units) 1,000
Price per unit $20.00
Variable cost per unit $14.50
Anual fixed costs $800
PPE market value in 4 years $400
Tax rate 35%
Cost of capital 8%
Inflation rate 1.5%
Estimated recovery value in 4 years $400
Opportunity cost $100

Process
Y0 Y1
Microprocessors sold (Q)
Price per unit
Variable cost por unit
Fixed costs
Operational income
Working capital required
Depreciation basis
Depreciation rate
Depreciation expense (annual)
Book value (Cost - Accumulated Dep)
Market value
Salvage gain (or lossess)
Taxes over earnings
Net cash flow from residual value

Output
Y0 Y1
Total income
Total variable costs
Fixed costs
Depreciation Expenses
EBIT
Taxes over earnings
Net profit after taxes
Add again the depreciation
PPE purchasing
Cash flow due to NOWC
Opportunity cost
Net cash flow from residual value
Net cash flow

B. Calculate the project feasibility

Project KPI's
Net Present Value (8% cost of capital) =
Internal Rate of Return =
Modified Internal Rate of Return =
Payback period =
ROCE =
Profitability Index (PI) =

Payback period support

Years
0 1
Net cash flow
CF accumulated
% of the year needed for recover the initial investment

Now let's perform a sensitivity analysis to determine NPV sensitivity regarding changes of price per unit, variable cost per unit, and the number of units
variables to 10% and 20% up and down considering as a bases their base case values. Add a chart for analysis purpose.

Project Scenario analysis

Variance from basis

Price per unit %
Change % Basis NPV
-20%
-10%
0%
10%
20%

Range
Variable cost
Change %
 Change % Basis NPV
Sensitivity anal
$12

$10

$8

$6
Units sold
Change % Basis NPV $4

$2

$0
-20% -10%

Price per uni

Units sold

Now let's perform a scenario analysis. Suppose that there is a 25% probability that an optimal market condition will occur, being the 20% percentage d
probability that a pesimist market conditions will occur, being the -20% percentage deviation this scenario, and there is a 50% probability that the base

Sale price Units sold Variable cost

Scenario Probability

Optimism 25%
Base 75%
Pesimist 25%

NPV expected =
Standar deviation =
NPV coefficient variance =

If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, ROCE, and payback.

NPV coefficient variance:

Cost of capital low risk = 8%
Average cost of capital = 10%
Cost of capital high risk = 13%

Cost of capital adjusted =

NPV adjusted to risk=
IRR =
Payback period =
ROCE =

Reference: Eugene F. Brigham (2013). Financial Management: Theory & Practice. ISBN 978-1111972219
on Making

create a new microprocessor for 2022 considering market

e microprocessors and the opportunity cost associated with that
t will require working capital as of 12% of annual sales. Each
Germany, the average country's inflation forecast for the next years

ext 4 years. Additionally, project returns are expected to be highly

K. ABC's tax rate is 35%. Its cost of capital is 10% for projects with
ts are evaluated with a cost of capital of 8%, and high-risk projects

Y2 Y3 Y4
 Y2 Y3 Y4

Years
2 3 4

per unit, and the number of units to be sold. Set the values of these
ose.

NPV in different scenarios

Price per unit Variable cost Units sold
 Sensitivity analysis (spide chart)

-20% -10% 0% 10% 20%

Price per unit Variable cost

Units sold

cur, being the 20% percentage deviation this scenario. There is a 25%
s a 50% probability that the base scenario will occur.

NPV

CE, and payback.

0.8 to 1.2