Exam 9: Risk Analysis, Real Options, and Capital Budgeting

Green Gardens is analyzing a proposed 5-year project that requires an investment of $77,000 in fixed assets and $17,400 in net working capital.The company uses straight-line depreciation over a project's life.Sales are estimated at 24,000 units ±3 percent.The expected variable cost per unit is $17,and the expected fixed costs are $39,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $36 a unit,±1 percent.The discount rate is 16 percent,and the tax rate is 35 percent.What is the net income under the pessimistic case scenario?

You are considering a new project with depreciation of $974,fixed costs of 11,580,and a sales price of $14.99.The variable cost per unit is $6.92.Ignore taxes.What is the accounting breakeven level of production?

Rosita's is considering a project with a discount rate of 9 percent.If the firm starts the project today,it will incur an initial cost of $32,260 and will receive cash inflows of $18,320 a year for 4 years.If the firm waits 1 year to start the project,the initial cost will decrease to $30,500,the cash flows will increase to $18,640 a year for 4 years,and the discount rate will decrease to 8.5 percent.What is the value of the option to wait?

Including the option to expand in project analysis will tend to

You are considering a project that has been assigned a discount rate of 12 percent.If you start the project today,you will incur an initial cost of $280 and will receive cash inflows of $350 a year for 3 years.If you wait 1 year to start the project,the initial cost will rise to $420 and the cash flows will increase to $385 a year for 3 years.What is the value of the option to wait?

If a project breaks even on an accounting profit basis,then

A 6-year project has expected sales of 2,000 units,±4 percent.The expected variable cost per unit is $8,and the expected fixed costs are $9,800.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $22 a unit,±3 percent.The project requires an initial investment of $42,000 for equipment that will be depreciated straight-line to zero over the project's life.The equipment has a pretax salvage value of $5,000 at the end of the project.The project requires $2,600 in net working capital during its life.The discount rate is 9 percent,and tax rate is 30 percent.What is the net present value for the optimistic scenario?

As a project's degree of sensitivity to variable costs increases,the

Fixed production costs are

Assume a project currently has a negative net present value.Which one of these expectations would indicate that the timing option for that project may have a positive value?

A project with a current negative net present value

Denver Mart is considering a project with a life of 5 years and an initial cost of $136,000.The discount rate is 11 percent.The firm expects to sell 2,200 units a year with a cash flow per unit of $26.The firm will have the option to abandon this project after 3 years at which time it expects it could sell the project for $48,000.The firm is interested in knowing how the project will perform if the sales forecast for Years 4 and 5 of the project are revised such that there is a probability of 50 percent that the sales will be 1,000 units and a probability of 50 percent they will be 2,500 units a year.What is the net present value of this project given your sales forecasts?

All else constant,the accounting profit breakeven level of sales will decrease when the

Ernestine is analyzing a 4-year project with an initial cost of $87,000,a required rate of return of 14 percent,and a chance of success of 4 percent.If the project succeeds,the annual cash flow will be $1,789,000.If the project fails,the annual cash flow will be -$131,000.The project can be shut down after the first 2 years but all monies invested will be lost.None of the initial cost can be recouped after 4 years.What is the net present value of this project at Time 0?

The Garden Mart is analyzing a proposed 3-year project.Expected sales are 16,000 units,±6 percent.The expected variable cost per unit is $4,and the expected fixed costs are $16,000.The fixed and variable cost estimates have a range of ±1 percent.The sales price is estimated at $15 a unit,±3 percent.The project requires an initial investment of $41,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $12,000 at the end of the project.The project requires $5,600 in net working capital.The discount rate is 16 percent,and the tax rate is 35 percent.What is the operating cash flow under the optimistic case scenario?

The option to wait: I.may have minimal value if a project relates to a rapidly changing technology. II.is partially dependent upon the discount rate applied to the project being evaluated. III.could have a negative value. IV.is valued based on a project's EAC.

In a decision tree,the accept/reject decision is dependent upon

To determine the lowest net present value that is likely to occur given a range of values for all of the relevant variables,a firm should conduct which type of analysis?

The Short Stack expects to sell 8,000 units,±2 percent.The expected variable cost per unit is $8,±3 percent,and the expected fixed costs are $20,000,±1 percent.The depreciation expense is $6,000.The sale price is estimated at $23 a unit,±2 percent.What is the sales revenue under the optimistic case scenario?

Ignoring taxes,which one of these is a correct formula for calculating the accounting profit breakeven point?