Exam 10: Project Analysis

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.

Expansion options generally show as an asset on a corporation's balance sheet.

The 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 will last for five years.The manufacturing cost per hammer is $1 and each hammer sells for $6.The cost of capital is 20%.Calculate the break-even sales volume per year.(Ignore taxes.Round to the nearest 1,000.)

Discounted cash-flow (DCF)analysis generally: I.assumes that firms hold assets passively when it invests in a project; II.considers opportunities to expand a project if the project is successful; III.considers opportunities to abandon a project if the project is a failure

The 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 the company $500 to produce and can be sold at $1500 per package to tourists.This tour package will last 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.Round to the nearest 1,000.)

Briefly explain the term real options.

Hammer Company proposes to invest $6 million in a new type of hammer-making equipment.The fixed costs are $1.0 million per year.The equipment will last for five years.The manufacturing cost per hammer is $1 and each hammer sells for $6.The cost of capital is 20%.Calculate the break-even sales volume per year.(Ignore taxes.Round to the nearest 1,000.)

The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant that will depreciate on a straight-line basis.Fixed costs are $3 million per year.A financial calculator costs $10 per unit to manufacture and sells for $30 per unit.If the plant lasts for four years and the cost of capital is 20%,what is the accounting break-even level of annual sales? (Assume no taxes.)

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

KMW Inc.sells finance textbooks for $150 each.The variable cost per book is $30 and the fixed cost per year is $30,000.The process of creating a textbook costs $150,000 and the average book has a life span of three years.What is the economic or NPV break-even number of books that must be sold each year given a discount rate of 12%?

Define the term abandonment value.

You calculate the following estimates of project cash flows: The revenues and costs occur in perpetuity,as opposed to the initial investment.The cost of capital is 8%.What does a sensitivity analysis of NPV (without taxes)show? (Answers appear in order: [Pessimistic,Most Likely,Optimistic].)

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 three years (starting next year,i.e.,at t = 1).If it fails,you will only have net cash flows of $10 million per year for two years (also 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 after the first year's cash flows are in,i.e.,at t = 1.You have to spend $80 million immediately for equipment and the rights to produce the figure.If the discount rate is 10%,calculate Hillary's NPV.

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 three years (starting next year,i.e.,at t = 1).If it fails,you will only have net cash flows of $10 million per year for two years (also 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,i.e.,at t = 1.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 immediately after the first year's cash flows are received,calculate Hillary's NPV with this abandonment option.(The discount rate is 10%.The equipment can only be resold at the end of the first year.)

Discuss the importance of conducting postaudits.

Indicate some of the problems associated with the capital investment process.

Generally,postaudits for projects are conducted to: I.identify problems that need fixing; II.check the accuracy of forecasts; III.generate questions that should have been asked before project commencement

The following are real options EXCEPT:

One can employ simulation models to: i.understand the project better; II)better understand forecasted cash flows; III)assess the project risk

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)?