Question 1

Briefly explain the term real options.

Accepted Answer

Real options are options to modify proje

Question 2

Briefly discuss various real options associated with capital budgeting projects.

Accepted Answer

There are four types of real options. Th

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Generally, postaudits for projects are conducted to

Accepted Answer

A) identify problems that need fixing only. 
B) check the accuracy of forecasts only. 
C) identify problems that need fixing and check the accuracy of forecasts only. 
D) identify problems that need fixing, check the accuracy of forecasts, and generate questions that should have been asked before project commencement. 
A) identify problems that need fixing only. 
B) check the accuracy of forecasts only. 
C) identify problems that need fixing and check the accuracy of forecasts only. 
D) identify problems that need fixing, check the accuracy of forecasts, and generate questions that should have been asked before project commencement.

Question 5

Generally, postaudits are conducted for large projects

Accepted Answer

A) shortly after the completion of the project. 
B) several years after the completion of the project. 
C) shortly after the project has begun to operate. 
D) well before the start of the project. 
A) shortly after the completion of the project. 
B) several years after the completion of the project. 
C) shortly after the project has begun to operate. 
D) well before the start of the project.

Question 6

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 percent).You will not know whether it is a hit or a failure until the first year's cash flows are in .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 once the first year's cash flows are received, calculate the value of the abandonment option.(The discount rate is 10 percent.)

Accepted Answer

A) -9.15 
B) +13.99 
C) +23.14 
D) 0.00 
A) -9.15 
B) +13.99 
C) +23.14 
D) 0.00

Question 7

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 percent.Calculate the break-even sales volume per year.(Ignore taxes.Round to the nearest 1,000.)

Accepted Answer

A) 500,000 units 
B) 600,000 units 
C) 450,000 units 
D) 550,000 units 
A) 500,000 units 
B) 600,000 units 
C) 450,000 units 
D) 550,000 units

Question 8

Generally, Monte Carlo models, for project analysis, use which device to generate simulations?

Accepted Answer

A) Pair of dice 
B) Roulette wheel 
C) Computer 
D) Pack of cards 
A) Pair of dice 
B) Roulette wheel 
C) Computer 
D) Pack of cards

Question 9

Monte Carlo simulation is mostly an advanced version of scenario analysis.

Accepted Answer

A) True 
 B)False

Question 10

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 percent to 15 percent, what is the change in the NPV of the project (approximately)?

Accepted Answer

A) 12,750 increase 
B) 12,750 decrease 
C) 14,240 increase 
D) 14,240 decrease 
A) 12,750 increase 
B) 12,750 decrease 
C) 14,240 increase 
D) 14,240 decrease

Question 11

Monte Carlo simulation involves the following steps:

Accepted Answer

A) Step 1: Modeling the project and Step 2: Specifying probabilities. 
B) Step 1: Modeling the project, Step 2: Specifying probabilities, and Step 3: Simulating cash flows. 
C) Step 2: Specifying probabilities, Step 3: Simulating cash flows, and Step 4: Calculating present value. 
D) Step 1: Modeling the project, Step 2: Specifying probabilities, Step 3: Simulating cash flows, and Step 4: Calculating present value. 
A) Step 1: Modeling the project and Step 2: Specifying probabilities. 
B) Step 1: Modeling the project, Step 2: Specifying probabilities, and Step 3: Simulating cash flows. 
C) Step 2: Specifying probabilities, Step 3: Simulating cash flows, and Step 4: Calculating present value. 
D) Step 1: Modeling the project, Step 2: Specifying probabilities, Step 3: Simulating cash flows, and Step 4: Calculating present value.

Question 12

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

Accepted Answer

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

Question 13

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 percent).You will not know whether it is a hit or a failure until the first year's cash flows are in .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 percent.The equipment can only be resold at the end of the first year.)

Accepted Answer

A) -9.10 
B) +9.10 
C) +13.99 
D) -14.40 
A) -9.10 
B) +9.10 
C) +13.99 
D) -14.40

Question 14

All else equal, an increase in fixed costs

Accepted Answer

A) increases the break-even point based on NPV and decreases the accounting break-even point. 
B) decreases the break-even point based on NPV and decreases the accounting break-even point. 
C) increases the accounting break-even point and decreases the break-even point based on NPV. 
D) increases the break-even point based on NPV and increases the accounting break-even point. 
A) increases the break-even point based on NPV and decreases the accounting break-even point. 
B) decreases the break-even point based on NPV and decreases the accounting break-even point. 
C) increases the accounting break-even point and decreases the break-even point based on NPV. 
D) increases the break-even point based on NPV and increases the accounting break-even point.

Question 15

Briefly discuss break-even analysis.

Accepted Answer

Break-even analysis provides the minimum

Exam 10: Project Analysis

Briefly explain the term real options.

Briefly discuss various real options associated with capital budgeting projects.

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

Generally, postaudits for projects are conducted to

Generally, postaudits are conducted for large projects

Generally, Monte Carlo models, for project analysis, use which device to generate simulations?

Monte Carlo simulation is mostly an advanced version of scenario analysis.

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 percent to 15 percent, what is the change in the NPV of the project (approximately)?

Monte Carlo simulation involves the following steps:

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

All else equal, an increase in fixed costs

Briefly discuss break-even analysis.

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

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 percent to 15 percent, what is the change in the NPV of the project (approximately)?