Exam 10: Project Analysis

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). Suppose the oil price is uncertain and can be $70/bbl or $40/bbl next year and then expected NPV of the project if postponed by one year is:

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

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:

You have come up with the following estimates of project cash flows: Pessimistic Most Likely Optimistic Investments -100 -80 -60 Total Revenues +30 +40 +50 Total Costs -20 -15 -10 The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show?

Tangible assets usually have higher abandonment value than intangible ones.

Monte Carlo simulation involves the following steps: I. Step 1: Modeling the project II. Step 2: Specifying probabilities III. Step 3: Simulate the cash flows IV. Step 4: Calculate present value

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:

Define the term "abandonment value."

In constructing a simulation model of an investment project, one can ignore possible interdependencies between variables.

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

Taj Mahal Tour Company proposes to invest $3 million in a new tour package project. Fixed costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the NPV break-even number of tourists per year? (Ignore taxes, give an approximate answer)

Postaudits are conducted before the start of the projects.

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% to 15%, what is the change in the NPV of the Project (approximately)?

Option to abandon a project is a:

Briefly explain the term "real options."

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

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

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

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: Year 0 1 2 3 4 5 Net Future Value 100 125 150 175 195 210

Project analysis, in addition to NPV analysis, includes the following procedures: I. Sensitivity analysis II. Break-even analysis III. Monte Carlo simulation IV. Scenario Analysis