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    Financial Management 2013

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    Reanne Claudine Laguna
    This document contains solutions to problems in a chapter on financial risk management. Problem 1 calculates the expected sales volume and contribution for a product with uncertain demand. Problem 2 evaluates a project using net present value analysis and calculates the break-even sales required. Problem 3 determines the sensitivity of a project's net present value to changes in costs, revenues, and discount rate. Problem 4 also calculates sensitivities for a project's net present value. The document provides examples of how to assess the financial riskiness of projects and products with uncertain cash flows.

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    Financial Management 2013

    Uploaded by

    Reanne Claudine Laguna
    16K views3 pages
    This document contains solutions to problems in a chapter on financial risk management. Problem 1 calculates the expected sales volume and contribution for a product with uncertain demand. Problem 2 evaluates a project using net present value analysis and calculates the break-even sales required. Problem 3 determines the sensitivity of a project's net present value to changes in costs, revenues, and discount rate. Problem 4 also calculates sensitivities for a project's net present value. The document provides examples of how to assess the financial riskiness of projects and products with uncertain cash flows.

    Original Description:

    A book by Ma. Elenita Cabrera... Answers to all problems

    Original Title

    Financial management 2013

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    This document contains solutions to problems in a chapter on financial risk management. Problem 1 calculates the expected sales volume and contribution for a product with uncertain demand. Problem 2 evaluates a project using net present value analysis and calculates the break-even sales required. Problem 3 determines the sensitivity of a project's net present value to changes in costs, revenues, and discount rate. Problem 4 also calculates sensitivities for a project's net present value. The document provides examples of how to assess the financial riskiness of projects and products with uncertain cash flows.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    16K views3 pages

    Financial Management 2013

    Uploaded by

    Reanne Claudine Laguna
    This document contains solutions to problems in a chapter on financial risk management. Problem 1 calculates the expected sales volume and contribution for a product with uncertain demand. Problem 2 evaluates a project using net present value analysis and calculates the break-even sales required. Problem 3 determines the sensitivity of a project's net present value to changes in costs, revenues, and discount rate. Problem 4 also calculates sensitivities for a project's net present value. The document provides examples of how to assess the financial riskiness of projects and products with uncertain cash flows.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
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    The document discusses concepts related to financial risk management and sensitivity analysis, including calculating net present value and the sensitivity of different factors in investment projects.

    Sensitivity analysis calculates how much a change in one factor would impact the net present value of a project, showing which factors the profitability depends on most.

    It analyzes the sensitivity of project cost, annual cash inflow or savings, and running costs, as these factors influence whether an investment project will be profitable or not based on its net present value.

    Solutions Manual

    CHAPTER 21-FINANCIAL RISK MANAGEMENT


    II. Multiple Choice Questions
    1.

    2.

    3.

    Problem 3
    Probability
    0.10
    0.30
    0.30
    0.20
    0.10
    1.00

    Sales Volume
    (units)

    Expected Sales
    Volume (units)

    2,000
    6,000
    8,000
    10,000
    14,000

    200
    1,800
    2,400
    2,000
    1,400
    7,800

    EV of contribution
    Less: Additional fixed overhead
    EV of additional cash profit per annum

    [7,800 x (12 8)]

    P31,200
    20,000
    P11,200

    (a) Calculation of expected value of NPV of project


    Year
    0
    16
    6
    Expected NPV

    Cash Flow
    P (40,000)
    11,200
    3,000

    DCF @ 10%

    PV of Cash Flow

    1.0000
    4.3550
    0.5645

    P (40,000)
    48,776
    1,694
    P 10,470

    (b) Calculation of minimum volume of sales per annum required to justify the project
    At break-even, the NPV would be zero. Taking the cost of the equipment and its residual value, the
    minimum required PV of annual cash profit would be as under:
    PV of capital outlay
    PV of residual value
    PV of actual cash profit required for NPV of 0

    P40,000
    1,694
    P38,306

    Discount factor of 1 per annum 6 years @ 10% is 4.355


    Annual cash profit required
    Annual (cash) fixed costs

    (P38,306/4.355)

    P 8,796
    20,000
    P28,796
    21-1

    Chapter 21

    Financial Risk Management

    Annual contribution required for NPV = 0


    Contribution per unit

    = P4

    Sales required to break-even:


    P28,796
    P4

    7,199 units

    Problem 4
    Annual cash inflow
    Less: Project cost
    Net present value

    (P4,500 x 2.9137)

    P13,112
    12,000
    P 1,112

    (a) Sensitivity for Project Cost


    If the project cost is increased by P1,112, the NPV of the project will become zero. Therefore, the sensitivity
    for project cost is:
    P1,112
    P12,000

    100

    9.27%

    (b) Sensitivity for Annual Cash Inflow


    If the present value of annual cash inflow is lower by P1,112, the NPV of the project will become zero.
    Therefore, the sensitivity for annual cash flow is:
    P1,112
    P13,112

    100

    8.48%

    (c) Sensitivity for Cost of Capital


    Let x be the annuity factor which gives a zero NPV (i.e., x is the IRR)
    - P12,000 + P4,500 x
    P4,500 x
    x
    x

    =
    =
    =
    =

    0
    P12,000
    P12,000/P4,500
    2.6667

    Hence, x = 2.6667 and at 18% for 4 years, the annuity factor is 2.6667.
    Sensitivity %

    18% 14%
    14%

    29%
    21-2

    Financial Risk Management

    Chapter 21

    Analysis:
    The cash inflow is more sensitive, since only 8.5% change in cash inflow will make the NPV of the project
    zero.
    Problem 5
    PV of Savings
    Year 1 (P60,000 x 0.9259)
    Year 2 (P70,000 x 0.8573)

    P 55,554
    60,011
    P115,565

    Less: PV of Running Cost


    Year 1 (P20,000 x 0.9259)
    Year 2 (P25,000 x 0.8573)
    Net savings
    Less: Purchase cost of plant
    Net present value

    P18,518
    21,432

    39950
    75,615
    70,000
    P 5,615

    (a) Sensitivity for Plant Cost


    If the purchase cost of plant increases by P5,615, the NPV of the project will become zero. Therefore, the
    sensitivity for plant cost is:
    P5,615
    P70,000

    100

    8.02%

    (b) Sensitivity for Running Cost


    If the present value of running cost increases by P5,615, the NPV of the project will become zero.
    Therefore, the sensitivity for running cost is:
    P5,615
    P39,950

    100

    14.06%

    (c) Sensitivity for Savings


    If the savings decrease by P5,615, the NPV becomes zero. Therefore, the sensitivity for savings is:
    P5,615
    P115,565

    100

    4.86%

    Analysis: Savings is the most sensitive.

    21-3

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