| Corporate finance course | Sentivity analysis |
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| • We regret that NPV doesn't handle with uncertainty. We want to determine the key variables that are responsible for the success or the failure of the project. Then we make calculations changing one variable at a time to its optimistic and pessimistic value. • We can also choose different scenarii. Then we change all variables and choose consistent combinations of them. • Break-even analysis. What is the level of sales we have to attain if we want not to loose money. BE point is when fixed costs= margin on variable costs Formula: BE=Fixed costs/margin on variable cost in % of turnover Here it is 150+300 / (375-300) = 225 000 millions USD or 60 000 scooters our security margin is 375 000 - 225 000 = 150 000 mil. USD we reach the BE point in 225 mil. /375 000 = 6 years then we can find the quantity sold to attain the BE, the date the BE is reached and our security margin Beware: when we choose accounting profit and not CF, we understimate the real level of the Break-even point. Because, we do not take account of the opportunity cost of capital. It is more realistic to calculate the PV of inflows and outflows. • The operating leverage is the project exposure to fixed costs. Low fixed costs present less risks and reduce the level of the break-even point Suppose we've got 1 project that can be handled with 2 different alternative technologies 1) 30 mil. USD fixed costs and 3 000 USD per unit 2) 190 mil. USD fixed costs and 1 200 USD per unit We plan to sell 100 000 units. Which is the best technology for this project ? • Monte-carlo simulation Method worked out by some McKinsey consultants. Requires a computer. Step 1: we determine a model of equations that fit the project Step 2: we determine the probabilities associated to each possible event. Step 3: we simulate CF after a certain number of simulations, we obtain the normal shape of the return curve of the project. This method is complicate, but help us think about a project. It is used by some large pharmaceutical companies for their R & D. Drawback: it costs a lot of money. Decision trees >> |
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Corporate finance PART ONE: CAPITAL EXPENDITURE PART TWO. BASICS OF FINANCE PART THREE FINANCING DECISIONS PART FOUR FINANCIAL MANAGEMENT Course created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
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