Exam 10: Project Analysis

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

Monte Carlo simulation is likely to be most useful:

The following options associated with a project increases managerial flexibility: I. Option to expand II. Option to abandon III. Production options IV. Timing options

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.)

Generally, postaudits are conducted for large projects:

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

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

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:

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

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)

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 NPV with the abandonment option. (The discount rate is 10%)

A project has an initial investment of 100. You have come up with the following estimates of the projects with cash flows. Pessimistic NPV Most Likely Optimistic Revenues 15 20 25 Costs -10 -8 -5 If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes) show?

Option to expand a project is 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 NPV break-even point occurs when:

The following are real options except:

Briefly describe sensitivity analysis used for project analysis.

The accounting break-even point occurs when:

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.)

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