Automatic Transmissions, Inc., has the following estimates for its new gear assembly project:...

Question:

Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,130 per unit; variable cost = $350 per unit; fixed costs = $4.86 million; quantity = 76,000 units. Suppose the company believes all of its estimates are accurate only to +/- 16 percent.

What values should the company use for the four variables given here when it performs its best case and worst-case scenario analysis? Fill in the blanks of the table.

Scenario Unit Sales Unit Price Unit Variable Cost Fixed Costs
Base case 76,000 $1,130 $350 $4,860,000
Best case
Worst case

Scenario Analysis

Scenario analysis in the context of capital budgeting decisions refers to the analysis of the impact of changes in underlying variables ( like units, unit price, unit variable cost, ) on the NPV of the project. In other words, It involves a ' what if ' analysis when several variables are changed simultaneously.

Answer and Explanation:

  • In scenario analysis, three scenarios are considered:

( 1) Base case scenario, where all variables assume their normal or expected values:

( 2 ) Best...

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What is What-If Analysis? - Definition & Examples

from Information Systems: Help and Review

Chapter 4 / Lesson 14
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