Problem Set


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Your response should be in an excel worksheet.

Up front, please note that your textbook does not cover these particular topics (e.g., sensitivity and scenario analyses) as referenced in the 2 questions below, however, given its importance, I am asking you to contemplate how you would take into consideration creating them. . Both require adjusting only a few inputs which would recalculate (provided that you build the model) to determine outcome. As an out and demonstrated below, if you cannot capture them quantitatively (via excel), feel free to describe qualitatively regarding how you would attempt to tackle these 2 questions.

Please type your answers on a spreadsheet. All calculations should be done on a spreadsheet. 5-23, 5-30 (Evaluation of NPV), 5-33 (Evaluation of NPV), and the 2 problems below:

Scenario Analysis
The RI Department of Transportation is researching the pricing strategy relating to a local company called Auto Transmissions Inc (ATI). ATI has the following estimates for its new gear assembly project: price = $960 per unit; variable cost = $350 per unit; fixed costs = $3.6 million; quantity = 55,000 units. Suppose the company believes all of its estimates are accurate only to within +/- 15%. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worse-case scenario analysis?

Sensitivity Analysis
For the company in the previous question, suppose you are most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern for ATI? Describe how you would calculate your answer. What values would you use for the other forecast variables?

Explanation & Answer

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