Question 1

Why is sensitivity analysis less realistic than Monte Carlo simulation?

Accepted Answer

Sensitivity analysis only changes one va

Question 2

In constructing a Monte Carlo simulation model of an investment project,one typically ignores possible interdependencies between variables.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) higher than the one calculated using book earnings. 
B) lower than the one calculated using book earnings. 
C) equal to the one calculated using book earnings. 
D) not related to the one calculated using book earnings. 
A) higher than the one calculated using book earnings. 
B) lower than the one calculated using book earnings. 
C) equal to the one calculated using book earnings. 
D) not related to the one calculated using book earnings.

Question 4

Briefly discuss various real options associated with capital budgeting projects.

Accepted Answer

There are four types of real options.The

Question 5

The Solar Calculator Company proposes to invest $5 million in a new calculator-making plant.Fixed costs are $2 million per year.A solar calculator costs $5 per unit to manufacture and sells for $20 per unit.If the plant lasts for three years and the cost of capital is 12%,what is the break-even level of annual sales? (Assume that revenues and costs occur at the end of each year.Assume no taxes.)Round to the nearest 1,000 units.

Accepted Answer

A) 133,000 units 
B) 272,000 units 
C) 228,000 units 
D) 244,000 units 
A) 133,000 units 
B) 272,000 units 
C) 228,000 units 
D) 244,000 units

Question 6

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

Accepted Answer

A) I and II only 
B) I,II,and III only 
C) II,III,and IV only 
D) I,II,III,and IV 
A) I and II only 
B) I,II,and III only 
C) II,III,and IV only 
D) I,II,III,and IV

Question 7

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

Accepted Answer

Monte Carlo simulation can provide an ex

Question 8

The following options associated with a project increase managerial flexibility:
i.option to expand; II)option to abandon; III)production options; IV)timing options

Accepted Answer

A) I only 
B) II only 
C) I,II,III,and IV 
D) IV only 
A) I only 
B) II only 
C) I,II,III,and IV 
D) IV only

Question 9

In most cases the present value break-even quantity is higher than the accounting break-even quantity.

Accepted Answer

A) True 
 B)False

Question 10

Firms with higher fixed costs tend to have higher degrees of operating leverage.

Accepted Answer

A) True 
 B)False

Question 11

Petroleum Inc.(PI)controls offshore oil leases.It is considering the construction of a deep-sea oil rig at a cost of $500 million.The price of oil is $100/bbl.and extraction costs are $50/bbl.PI expects prices and costs to remain constant.The rig will produce an estimated 1,200,000 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.

Accepted Answer

A) +100,000,000 
B) +80,000,000 
C) +60,000,000 
D) +40,000,000Easiest to do computations in $M. 
A) +100,000,000 
B) +80,000,000 
C) +60,000,000 
D) +40,000,000Easiest to do computations in $M.

Question 12

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0).You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60% of revenues.(Assume all revenues and costs occur at year-end,i.e.,t = 1,t = 2,and t = 3.)The equipment depreciates using straight-line depreciation over three years.At the end of the project,the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30% and the cost of capital is 15%.Cash flows from the project are:

Accepted Answer

A) CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600. 
B) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600. 
C) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600. 
D) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 49,600.Initial Investment = 90,000 + 10,000 = 100,000; CF0 = -100,000;CF1 and CF2: (120,000 - 72,000 - 30,000)(1 - 0.3)+ 30,000 = 42,600;CF3: (120,000 - 72,000 - 30,000)(1 - 0.3)+ 30,000 + (10,000)(1 - 0.3)+ 10,000 = 59,600. 
A) CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600. 
B) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600. 
C) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600. 
D) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 49,600.Initial Investment = 90,000 + 10,000 = 100,000; CF0 = -100,000;CF1 and CF2: (120,000 - 72,000 - 30,000)(1 - 0.3)+ 30,000 = 42,600;CF3: (120,000 - 72,000 - 30,000)(1 - 0.3)+ 30,000 + (10,000)(1 - 0.3)+ 10,000 = 59,600.

Question 13

Monte Carlo simulation is a tool intended to consider all possible combinations of variables.

Accepted Answer

A) True 
 B)False

Question 14

The option to wait is a type of abandonment option.

Accepted Answer

A) True 
 B)False

Question 15

The break-even point in terms of NPV is usually lower than the break-even point on an accounting basis.

Accepted Answer

A) True 
 B)False

Question 16

Project analysis,beyond simply calculating NPV,includes the following procedures:
I.sensitivity analysis;
II.break-even analysis;
III.Monte Carlo simulation;
IV.scenario analysis

Accepted Answer

A) I only 
B) I and II only 
C) I,II,and III only 
D) I,II,III,and IV 
A) I only 
B) I and II only 
C) I,II,and III only 
D) I,II,III,and IV

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Explain the usefulness of decision trees in project analysis.

Accepted Answer

Financial managers use decision trees in

Question 20

The NPV break-even point occurs when:

Accepted Answer

A) the present value of inflows line cuts the present value of outflows line. 
B) the total revenue line cuts the fixed cost line. 
C) the total revenue line cuts the total cost line. 
D) the present value of inflows cuts the total cost line. 
A) the present value of inflows line cuts the present value of outflows line. 
B) the total revenue line cuts the fixed cost line. 
C) the total revenue line cuts the total cost line. 
D) the present value of inflows cuts the total cost line.

Exam 10: Project Analysis

Why is sensitivity analysis less realistic than Monte Carlo simulation?

In constructing a Monte Carlo simulation model of an investment project,one typically ignores possible interdependencies between variables.

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

Briefly discuss various real options associated with capital budgeting projects.

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

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

The following options associated with a project increase managerial flexibility: i.option to expand; II)option to abandon; III)production options; IV)timing options

In most cases the present value break-even quantity is higher than the accounting break-even quantity.

Firms with higher fixed costs tend to have higher degrees of operating leverage.

Monte Carlo simulation is a tool intended to consider all possible combinations of variables.

The option to wait is a type of abandonment option.

The break-even point in terms of NPV is usually lower than the break-even point on an accounting basis.

Project analysis,beyond simply calculating NPV,includes the following procedures: I.sensitivity analysis; II.break-even analysis; III.Monte Carlo simulation; IV.scenario analysis

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

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

Explain the usefulness of decision trees in project analysis.

The NPV break-even point occurs when:

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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