Question

You are tasked with evaluating Wacky Widgets' three-year expansion project. You have conducted a scenario analysis of the best and worst-case scenarios, as well as a sensitivity analysis. Based on your findings, please answer the following:

Describe the best-case and worst-case scenarios for Wacky Widgets' expansion project. What are the key variables and outcomes in each scenario?

In your sensitivity analysis, you explored various ranges of sales, variable costs, and required rates of return. Can you explain the impact of these changes on the project's outcomes and feasibility?

What did you learn from the sensitivity analysis about the project's vulnerability to different economic conditions and variables?

Given all the analysis and information, would you recommend approving the project? Please provide your rationale for your decision.

Answer 1

The best-case scenario envisages high sales and low costs leading to increased profitability, while the worst case involves low sales and high costs. Sensitivity analysis reveals the project's response to key variable changes. Project approval requires evaluation of profitability margins and risk exposure identified by these analyses.

Step-by-step explanation:

When evaluating an expansion project, the best-case scenario envisions the highest level of sales growth, the lowest variable costs, and a favorable rate of return. Key variables include high demand, strong market share, and cost efficiencies leading to increased profitability. Conversely, the worst-case scenario involves significant challenges such as poor sales, high variable costs, and a lack of the required rate of return on investment, which may signal potential losses for Wacky Widgets.

In conducting a sensitivity analysis, we assess how changes in sales volumes, variable costs, and required rates of return impact the project's financial outcomes. An increase in sales, for example, generally improves profitability, while lowering variable costs raises margins. However, a higher required rate of return puts pressure on the project to perform better financially to be considered viable.

The sensitivity analysis reveals the project's vulnerability to different economic conditions. From this, we learn which variables have the most significant effect on the project's success, hence highlighting areas of risk and potential opportunity. For instance, if the analysis shows that slight changes in variable costs lead to large variances in outcome, then managing those costs becomes critical for project stability.

Based on these insights, if the best-case scenario's higher profitability margins and robustness in the face of economic fluctuations are supported by the sensitivity analysis, approval of the project can be considered. However, if the results show a high susceptibility to adverse conditions that risk the company's financial stability, it could be prudent to reconsider the project.