UCLA TitMar Motor Company Project Risk Analysis
Description
3-7 Project Risk Analysis—Breakeven Sensitivity The TitMar Motor Company is considering the production of a new personal transportation vehicle (PTV). The PTV would compete directly with the innovative new Segway. The PTV will utilize a three-wheel platform capable of carrying one rider for up to six hours per battery charge thanks to a new battery system developed by TitMar. TitMar’s PTV will sell for substantially less than the Segway but will offer equivalent features. The pro forma financials for the proposed PTV project, including the forecasts and assumptions that underlie them, are set out in Exhibit P3-7.1. Note that revenue is calculated as follows: price per unit × market share (%) × market size and units sold = revenues/price per unit. The project offers an expected NPV of $9,526,209 and an IRR of 39.82%. Given TitMar’s stated hurdle rate of 18%, the project looks like a winner. Even though the project looks very good based on management’s estimates, it is risky and can turn from a positive NPV investment to a negative one with relatively modest changes in the key value drivers. Develop a spreadsheet model of the project valuation and answer the following questions
:Exhibit P3-7.1 TitMar Motor Company PTV Project
If the firm’s market share turns out to be only 5%, what happens to the project’s NPV and IRR?
6-12 Forecasting Pro Forma Financial Statements Prepare a pro forma income statement and balance sheet for Webb Enterprises (see Problem 6-7), where revenues are expected to grow by 20% in 2016. Make the following assumptions in making your forecast of the firm’s balance sheet for 2016:
The income statement expenses are a constant percentage of revenues except for interest, which remains equal in dollar amount to the 2015 level, and taxes, which equal 40% of earnings before taxes.
The cash and marketable securities balance remains equal to $500, and the remaining current asset accounts increase in proportion to revenues for 2015.
Net property, plant, and equipment increase in proportion to the increase in revenues and depreciation expenses for 2016 is $2,000.
Accounts payable increases in proportion to firm revenues.
Owners’ equity increases by the amount of firm net income for 2011 (no cash dividends are paid).
Long-term debt remains unchanged, and short-term debt changes in an amount that balances the balance sheet.
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