Exam 10: Project Analysis

Generally, postaudits for projects are conducted: I. to identify problems that need fixing II. to check the accuracy of forecasts III. to come up with questions that should have been asked before the project was undertaken

Discuss the importance of conducting post audits.

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 is 12%, what is the approximate break-even level (accounting) of annual sales? (Assume no taxes.)(approximately)

Projects with high fixed costs have lower break-even points.

Simulation models are useful: I. To understand the project better II) To forecast expected cash flows III. To assess the project risk

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 12%. Calculate the NPV of the project:

Briefly explain timing options.

In almost al cases the present value break even quantity is higher than the accounting break even quantity.

A firm's capital investment proposals should reflect: I. Capital budgeting process II. Strategic planning process III. Middle managers' ideas and views

Most firms keep track of the progress of projects by conducting postaudits shortly after the projects have begun to operate.

In drawing a decision tree, it is important to include all possible eventualities.

The Consumer- Mart Company is going to introduce a new consumer product. If brought to market without research about consumer tastes the firm believes that there is a 60% chance that the product will be successful. If successful, the project has a NPV = $500,000. If the product is a failure (40%) and withdrawn from the market, then NPV = -$100,000. A consumer survey will cost $60,000 and delay the introduction by one year. If the survey is successful, then there is an 80% chance of consumer acceptance, in which case the NPV = $500,000. If, on the other hand the survey is a failure, then NPV = -$100,000. The discount rate is 10%. By how much does the marketing survey change the expected net present value of the project? (approximately)

Generally, the simulation models for projects are developed using a:

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 accounting break-even level? (Approximately)(Assume no taxes.)

The following are drawbacks of sensitivity analysis except: