As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your...

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Answered Same DayJan 25, 2021

Answer To: As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital...

Ashish answered on Jan 26 2021
152 Votes
Sheet1
    Solution-a
        Sensitivity Analysis
        Alternative A
        Changing the initial investment by 15% and keeping the cash flows
        Alternative A (Best Case Initial Investment)
            0    1    2    3    4    5
        Initial Investment    ($
164,900)
        Cost savings        $86,000    $86,000    $67,000    $56,000    $39,000
        Tax @ 35%        $30,100    $30,100    $23,450    $19,600    $13,650
        After tax savings        $55,900    $55,900    $43,550    $36,400    $25,350
        PV @ 15%    ($164,900)    $48,609    $42,268    $28,635    $20,812    $12,603
            Tax rate    r rate    CCA rate    Cost    Salvage
            35%    15%    30%    $164,900    $0
        PVCCATS =    $35,967
        NPV =    $23,995
        Alternative A (Worst Case Initial Investment)
            0    1    2    3    4    5
        Initial Investment    ($223,100)
        Cost savings        $86,000    $86,000    $67,000    $56,000    $39,000
        Tax @ 35%        $30,100    $30,100    $23,450    $19,600    $13,650
        After tax savings        $55,900    $55,900    $43,550    $36,400    $25,350
        PV @ 15%    ($223,100)    $48,609    $42,268    $28,635    $20,812    $12,603
            Tax rate    r rate    CCA rate    Cost    Salvage
            35%    15%    30%    $223,100    $0
        PVCCATS =    $48,662
        NPV =    ($21,511)
        Alternative A
        Changing the initial investment by 40% and keeping the cash flows
        Alternative A (Best Case Production Savings)
            0    1    2    3    4    5
        Initial Investment    ($194,000)
        Cost savings        $120,400    $120,400    $93,800    $78,400    $54,600
        Tax @ 35%        $42,140    $42,140    $32,830    $27,440    $19,110
        After tax savings        $78,260    $78,260    $60,970    $50,960    $35,490
        PV @ 15%    ($194,000)    $68,052    $59,176    $40,089    $29,137    $17,645
            Tax rate    r rate    CCA rate    Cost    Salvage
            35%    15%    30%    $194,000    $0
        PVCCATS =    $42,314
        NPV =    $62,413
        Alternative A (Worst Case Production Savings)
            0    1    2    3    4    5
        Initial Investment    ($194,000)
        Cost savings        $51,600    $51,600    $40,200    $33,600    $23,400
        Tax @ 35%        $18,060    $18,060    $14,070    $11,760    $8,190
        After tax savings        $33,540    $33,540    $26,130    $21,840    $15,210
        PV @ 15%    ($194,000)    $29,165    $25,361    $17,181    $12,487    $7,562
            Tax rate    r rate    CCA rate    Cost    Salvage
            35%    15%    30%    $194,000    $0
        PVCCATS =    $42,314
        NPV =    ($59,929)
        The huge change in the NPV because of change in annual cost savings. Therefore, the NPV is higher sensitivity to change in cost savings than the initial investment on the basis of assumes range...
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