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Departement de science economique Department of Economics ENGINEERING ECONOMICS ECO 1192B Green Assignment #2: Sensitivity A

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Departement de science economique

Department of Economics

ENGINEERING ECONOMICS

ECO 1192B

Green Assignment #2: Sensitivity

A. Assignment Instructions

1. Completing an unallocated assignment will result in a zero (0%) score.

2. You will submit your assignment #2 answers on Bright space on April 1 between 7 and 7:30 pm (Ottawa, Ontario time).

3. Assignment answers submitted late or by other means will be rejected.

4. The sequence of assignment questions in this document will be maintained on April 1 (i.e., no question scrambling)

5. Where appropriate

• Four options will be provided for an assignment question.
• Options will consist of ranges of dollars, percentages etc. depending on the question.

6. Please consult the appropriate Background Paper on bright space or seek assistance during my weekly office hour.

B. Problem Statement

• As the sole owner of a microbrewing company, you are contemplating the purchase of additional equipment to meet your company’s brewing Capacity.
• Even though you have completed considerable research and analysis, you know your investment would not perform exactly as projected by the equipment vendor.
• Due to lingering uncertainty, an expert has been hired to perform a one- way sensitivity analysis of your potential equipment purchase.
• The current “best” guesses for the project parameters are:

1. Initial Cost (P) = $800,000

2. Salvage value (SV) = $97,988

3. Annual operating revenues (AOR) = $500,000

4. Annual operating costs (AOC) = $300,000

5. Economic life (N) = 5 years

6. MARR = 10%

7. Inflation Rate = 0%.

One-way Sensitivity Table
Net Present Worth (NPW)
Parameters	-15%	-10%	-5%	Reference Scenario	+5%	+10%	+15%
P	AA					BB
AOR		EE			DD		CC
AOC			FF	GG		HH
SV	II	JJ					KK
N			NN			MM	LL
MARR	OO						PP

 

1. The dollar value of AA is

2. The dollar value of BB is

3. The dollar value of CC is

4. The dollar value of DD is

5. The dollar value of EE is

6. The dollar value of FF is

7. The dollar value of GG is

8. The dollar value of HH is

9. The dollar value of Il is

10. The dollar value of JJ is

11. The dollar value of KK is

12. The dollar value of LL is

13. The dollar value of MM is

14. The dollar value of NN is

15. The dollar value of OO is

16. The dollar value of PP is

17. the most influential parameter on the project's NPW in the -15% to +15% range is

18. The third most influential parameter on the project's NPW in the 15% to +15% range is

19. If you plotted a spider diagram instead of completing a sensitivity Table for any project, the second most influential project parameter would have

a) the curve with second steepest positively or negatively sloped curve.

b) the second steepest positively sloped curve.

c) the second steepest negatively sloped curve.

d) it is impossible to determine project sensitivity to its parameters from the spider diagram.

20. The breakeven (NPW=$0) dollar value of the initial cost parameter (P) is

21. The breakeven (NPW=$0) dollar value of the annual revenue parameter (AOR) is

22. The breakeven (NPW=$0) dollar value of the annual cost parameter (AOC) is

23. The breakeven (NPW=$0) dollar value of the salvage value parameter (SV) Is

24. The breakeven (NPW=$0) life (N) of the project is

25. The breakeven (NPW=$0) MARR of the project is

26. You are asked to perform a scenario analysis instead of a sensitivity analysis. Assume that the values of the three scenarios (optimistic, most likely and pessimistic) are to be populated from the NPW dollar values of the sensitivity table which you completed above.

The dollar value of the project’s annual operating cost (AOC) for the pessimistic scenario would be a) 0; b) 310,000(1.15); c) 310,000; d) 310,000(0.85).

27. You are asked to perform a scenario analysis instead of a sensitivity analysis. Assume that the values of the three scenarios (optimistic, most likely and pessimistic) are to be populated from the NPW dollar values of the sensitivity table which you completed above.

The project's MARR for the optimistic scenario would be

a) 10%(0.85); b) 10%; c) 10%(1.15).

28. You are asked to perform a scenario analysis instead of a sensitivity analysis. Assume that the values of the three scenarios (optimistic, most likely and pessimistic) are to be populated from the NPW dollar values of the sensitivity table which you completed above.

The project's life (duration) for the pessimistic scenario would be

a) 5(0.15) years; b) 5(0.85) years; c) 5 years; d) 5(1.15) years.

29. If the sensitivity Table for this assignment was based on the Simple Payback Method instead of the Net Present Worth (NPW) decision criterion, would the breakeven parameter values calculated above be different?

30. Some companies prefer to account for a risky future by adding a risk premium to its risk-free MARR.

Assume that the paving company is publicly owned (and not owned by you as stated in opening assignment statement) and the company needed to raise equity capital to finance the $800,000 investment. If

• The risk-free interest rate (a risk-free rate is the MARR that includes a real (inflation-free) rate of return and an inflation rate but excludes a risk premium) is 10% (the MARR used in your sensitivity Table.
• The average market MARR is 15% (which includes an inflation-free rate, an inflation rate and a risk premium).
• The company’s Beta is 2 (Beta reflects a company’s volatility relative to the overall market volatility; the higher Beta, the greater the company’s volatility).

Consult the lecture notes on risk for the formula required for this question.

Find the company’s discount rate (MARR) (which includes a real rate of return, an inflation rate and the company’s risk premium) used to finance the purchase of the additional paving equipment?