Exam 10: Project Analysis

Hammer Company proposes to invest $6 million in a new type of hammer-making equipment.The fixed costs are $1 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 percent.Calculate the break-even sales volume per year.(Ignore taxes.Round to the nearest 1,000.)

Which of the following does not represent an option to expand a project?

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

The following options associated with a project increase managerial flexibility:

Explain the usefulness of decision trees in project analysis.

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

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 percent, 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.

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 percent 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 percent and the cost of capital is 15 percent.Calculate the NPV of the project.

Define the term abandonment value.

The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant.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 percent, 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.

Briefly describe sensitivity analysis as used for 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 percent.Calculate the after-tax cash flow for the project for year 1.

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 costs to remain constant.The rig will produce an estimated 1,200,000 bbl.per year forever.The risk-free rate is 10 percent per year, which is also the cost of capital.(Ignore taxes).Suppose that oil prices are uncertain and are equally likely to be $120/bbl.or $80/bbl.next year.Calculate today's NPV of the project if it were postponed by one year.

Most firms' capital investment proposals originate from

The Consumer-Mart Company is going to introduce a new consumer product.If it is brought to market without research about consumer tastes, the firm believes that there is a 60 percent chance that the product will be successful.If successful, the project has a NPV = $500,000.If the product is a failure (40 percent) and withdrawn from the market, then NPV = -$100,000.A consumer survey will cost $60,000 and delay the introduction by one year.With a survey, there is an 80 percent chance of consumer acceptance, in which case the NPV = $500,000.If, on the other hand, the product is a failure (20 percent) and withdrawn from the market, then NPV = -$100,000.The discount rate is 10 percent.By how much does the marketing survey change the expected net present value of the project?

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 percent, what is the accounting break-even level of annual sales? (Assume no taxes.)

Project analysis, beyond simply calculating NPV, includes the following procedures:

Adding a fudge factor to the cost of capital will penalize longer-term projects more due to compounding.

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

Discounted cash-flow (DCF) analysis generally