Exam 13: Risk Analysis and Project Evaluation

Webster Footwear believes that a new line of foul weather footwear they are planning to introduce this year will result in an NPV of $500,000 if the winter weather is exceptionally cold and wet,$400,000 if weather is normal,and $200,000 if winter is relatively warm and dry.The probability of a hard winter is 30%,an average winter is 50%,and a mild winter 20%.Compute the project's expected NPV.

If Untel Inc.decides to manufacture a new generation of computer chips with a brief 2 year product life cycle,it expects to sell 1 million units each year.Variable cost per unit will be $75,fixed costs $5 million,and depreciation $3 million.The initial investment will be $22.91 million.Untel uses a discount rate of 10%;its marginal tax rate is 40%.To reach break-even NPV,UNTEL must sell the chips for at least ________ each.

Accounting break-even analysis solves for the level of sales that will result in:

For a line of snowblowers sold by Arctic Equipment,fixed costs,including depreciation of $1,000,000,total $2,400,000.The snowblowers sell for $800 each.Variable costs of a snowblower are $500.Compute a.accounting break-even. b.cash break-even

Most of the variables used in forecasting cash flows are known with certainty.

Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each.Variable cost of a croissant is $0.75.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same,free cash flow will increase by ________.

Tennessee Fried Chicken is evaluating a proposal to open a fast food restaurant in Westphalia.The restaurant will cost $14.5 million to open.Expected cash flows are $4 million per year for the first five years.At the end of 5 years,the government of Westphalia will either revoke TFC's permit and the restaurant will close,or renew the permit indefinitely.In that case,assume that the $4 million turns into a perpetuity.There is a 30% chance the permit will be revoked and a 70% chance it will be renewed.Compute the expected NPV of the project.Use a discount rate of 12%.

One type of real option is to delay the beginning of a project until conditions are more favorable.

What is the expected free cash flow for the worst case scenario?

What is the project's NPV if success is modest and it is not expanded?

What is the expected free cash flow if the most likely estimates are used?

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?

The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as:

Variable cost for Light.com's fluorescent tubes is $12.50,the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?

Which of the following is considered the major risk when analyzing projects in a multinational environment?

Miller River Light that manufactures the project will require an initial investment of $350,000.Miller River uses a 12% discount rate for capital projects of this type.What level of operating cash flows over a period of 5 years will cause the project to reach break-even NPV?

If the worst case scenario for a project results in an NPV of zero,the project should be accepted.

Klaus Nicholas plans to sell Christmas trees from a vacant lot in downtown Springfield.The trees will cost him $1200 per 100 tress.They can only be purchased in lots of 100.It will cost Klaus $1,500 to rent the lot from November 1 through December 30.If Klaus sells the trees for $20 each,how many trees must he sell to break even? Assume that he purchases makes an initial,non-refundable purchase of 300 trees.

Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each.Variable cost of a croissant is $0.75.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a croissant to $1.50 sales will fall by 50,000 croissants.Free cash flow will increase or decrease by:

Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by: