Wonderpump: Sensitivity Analysis

4. Sensitivity analysis

4.1. Areas that required a sensitivity analysis

According to exhibit and appendix 1 a sensitivity analysis is required for price and cost of raw materials. Besides, price impacts variables such as quantity of units to be sold and technical support.

Price is highly sensitive, since chemical industry (Wonderpump´s customers) needs to be high cost effective to compete. Besides, average price of pumps sold by AGT in 2012 was 5.000, while Wonderpump´s price is 140% higher. Furthermore, Bestpumps the main competitor launched new pumps between 6.000 and 7.000 that are also life extended. All those reasons show a high likelihood that price should be reduce in years 1 and 2.

On the other hand if prices are not reduced for

According to those facts there are four scenarios to consider (Table 9).

Table 9 Scenarios sensitivity analysis

4.2. Investment assessment and sensitivity analysis

After calculating cash flows and investment appraisals, the variable that has a mayor impact in Wonderpump is the increase of raw material´s costs, since if it does not change, Wonderpump is a profitable project event if sales (price or quantities) reduce or remain stables (Table 10).

Table 10 Investment assessment and sensitivity analysis

Considering this scenarios, it is important to identify strategies that can be adopted to reduce the impact of changes in raw material costs and discuss them with investment committee.

5. Reassess of the discount rate

Although Bestpump´s business risk is closely to Wonderpump project, since AGT does not have debt and Bestpump does, to apply Bestpump´s discount rate in Wonderpump project, it is necessary to find Bestpump´s ungeared beta and then AGT´s cost of equity. Calculations are as

6. Capital structure and the discount rate

6.1. Features of debt and equity financing

Financing through equity or debt has advantages and disadvantages as follows:

Equity is more flexible for the company, since in a situation of lack of liquidity shareholders return could be delay or stopped, while debt interest always have to be paid (Atrill and McLaney, 2015).

Debt is faster to obtain than a securities issue (Atrill and McLaney, 2015).

Related to control, a debt does not provide lenders control over company´s operations and management decisions, except some previous agreements with lenders about limiting future borrowings, sale of assets and pay of dividends. On the other hand a security provides control to the shareholder. A disadvantage of financing new projects through equity is that every issue of shares dilutes shareholders control (Brealey et al, 2014).

Considering cost debt has a benefit, since it can be used to reduce company´s tax, while issuing securities imply a cost and return on equity has a tax for each stakeholder (Atrill and McLaney,