Exam 10: Project Analysis

Given the following net future values for harvesting trees (one time harvest): If the cost of capital is 15%, calculate the optimal year to harvest:

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

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 is expected to last for five years. The manufacturing cost per hammer is $1and the selling price per hammer is $6. Calculate the break-even volume per year. (Ignore taxes.)

Abandonment option is a call option, while the option to expand is a put option.

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

Briefly discuss the usefulness of Monte Carlo simulation in project analysis.

Monte Carlo simulation is a tool for considering all possible combinations of variables.

Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break-even level of annual rates? (Approximately)(Assume no taxes.)

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV of the project be if the revenues were higher by 10% and the costs were 65% of the revenues?

Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (I0) and is expected to remain constant. The price of oil is $50/bbl and the extraction costs are $20/bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year, which is also the cost of capital (Ignore Taxes). Calculate the NPV to invest today.

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the project:

Which of the following statements most appropriately describes "Scenario Analysis".

In drawing a decision tree, a square represents a decision point, and a triangle represents a decision point for fate.

Briefly discuss various real options associated with capital budgeting projects.

Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for $20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level of annual sales? (Assume no taxes.)(approximately)

Firms often calculate a project's break-even sales using book earnings. Generally, break- even sales based on NPV is:

Monte Carlo simulation is merely an advanced version of scenario analysis.

Everything else remaining the same, 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

After the completion of project analysis, the final decision on the project would be from:

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 3 years (starting next year). If it fails, you will only have net cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%). You will not know whether it is a hit or a failure until 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 you can sell your equipment for $60 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10%)