Exam 10: Project Analysis

After completing a project analysis, an analyst should rely on which tool to make a final recommendation on the project?

All else equal, an increase in fixed costs I.increases the break-even point based on NPV; II.increases the accounting break-even point; III.decreases the break-even point based on NPV; IV.decreases the accounting break-even point

KMW Inc. sells finance textbooks for $150 each. The variable cost per book is $30 and the fixed cost per year is $30,000. The process of creating a textbook costs $150,000 and the average book has a life span of three years. What is the economic or NPV break-even number of books that must be sold each year given a discount rate of 12 percent?

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60 percent of revenues. (Assume all revenues and costs occur at year-end, i.e., t = 1, t = 2, and t = 3). The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 21 percent and the cost of capital is 15 percent. Cash flows from the project are

Which of the following simulation outputs is likely to be most useful and easy to interpret? The output that shows the distribution(s)of the project's

The Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are $0.5 million per year. The equipment will last for five years. The manufacturing cost per hammer is $1 and each hammer sells for $6. The cost of capital is 20 percent. Calculate the break-even sales volume per year. (Ignore taxes. Round to the nearest 1,000.)

A project has the following cash flows: C₀ = −100,000; C₁ = 50,000; C₂ = 150,000; C₃ = 100,000. If the discount rate changes from 12 percent to 15 percent, what is the CHANGE in the NPV of the project (approximately)?

Petroleum Inc. (PI)controls offshore oil leases. It is considering the construction of a deep-sea oil rig at a cost of $500 million. The price of oil is $100/bbl. and extraction costs are $50/bbl. PI expects prices and costs to remain constant. The rig will produce an estimated 1,200,000 bbl. per year forever. The risk-free rate is 10 percent per year, which is also the cost of capital. (Ignore taxes). Calculate the NPV to invest today.

You are given the following net future values for harvesting trees from a plot of forestland. (This is a one-time harvest.) If the cost of capital is 15 percent, calculate the optimal year to harvest.

Firms with higher fixed costs tend to have higher degrees of operating leverage.

Monte Carlo simulation should be used to get the distribution of NPV values for a project.

You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for three years (starting next year [i.e., at t = 1]). If it fails, you will only have net cash flows of $10 million per year for two years (also starting next year). There is an equal chance that it will be a hit or failure (probability = 50 percent). You will not know whether it is a hit or a failure until after the first year's cash flows are in . You have to spend $80 million immediately for equipment and the rights to produce the figure. If the discount rate is 10 percent, calculate Hillary's NPV.

Briefly describe sensitivity analysis as used for project analysis.

A project has an initial investment of 100. You have come up with the following estimates of the project's cash flows (there are no taxes): Suppose the cash flows are perpetuities and the cost of capital is 10 percent. Conduct a sensitivity analysis of the project's NPV to variations in revenues. (Answers appear in order: [Pessimistic, Most Likely, Optimistic].)

Firms often calculate a project's break-even sales using accounting profit. However, break-even sales based on NPV is generally

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60 percent of revenues. (Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]). The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 21 percent and the cost of capital is 15 percent. What is the NPV of the project if the revenues were higher by 10 percent and the costs were 65 percent of the revenues?

How do managers supplement the NPV analysis of a project to gain a better understanding of a project?

Indicate some of the problems associated with the capital investment process.

The NPV break-even point occurs when

You are given the following data for year 1: Revenues = 100; Fixed costs = 30; Total variable costs = 50; Depreciation = $10; Tax rate = 21 percent. Calculate the after-tax cash flow for the project for year 1.