Exam 13: Risk Analysis and Project Evaluation

The NPV of a project based on forecasted cash flows is $1,000,000.There is a 40% probability that cash flows from the project will be seriously reduced because competitors will enter the market.In this case,if the company did nothing,the NPV would be ($500,000).The project can also be abandoned after 2 years and NPV will be ($100,000).What is the expected NPV of the project when the option to abandon is considered.Should the projected be accepted?

What is the NPV of the project if first year savings are only $75,000 and the project is sold.

Natick Nurseries has used scenario analysis to evaluate the purchase of a former dairy to use for nursery stock.The best case scenario produced a very favorable NPV of $4,000,000;the NPV of the most likely case was $2,000,000,but the worst case scenario resulted in an NPV of $(3,000,000)which would bring the company close to bankruptcy.Natick could improve its decision by:

What is the expected net operating profit after tax (NOPAT)for the worst case scenario?

What is the expected NPV of the project if the option to abandon is not considered.

When using simulation to analyze a large capital project,the decision rule is:

When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.Quineboag's degree of operating leverage (DOL)is ________.

________ is a method of quantifying uncertainty without having to estimate probabilities.

Which of the following abilities are crucial for risk analysis?

Real options can be either calls,options to buy the project,or calls,options to sell the project.

In capital-budgeting decisions,simulation analysis gives a probability distribution only for cash flows.

Lemminburg Plastics estimates a 60% probability that sales of pink flamingo lawn ornaments in the summer of 2011 will be 45,000 units,about the same as in 2010.They believe there is a 20% probability that they will go viral and potential sales would be 90,000.There is also a 20% probability that restrictive zoning ordinances will limit sales to 30,000 units.Expected unit sales of the pink flamingos are ________.

The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January.It will cost them $5,000 per night for theater rental,event insurance and professional musicians.The theater will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?

Project Zeta is expected to produce after-tax cash flows $30 million in year 1,$40 million in year 2,and $50 million in year 3.If the company uses a 12% required rate of return,what is the most it can invest in this project and break even with respect to NPV?

In reality,anticipated cash flows are only estimates and are thus uncertain.

What is the expected NPV of the project with the option to expand if the probability of modest success is revised to 70% and great success to 30%?

Accounting break-even analysis uses:

What is the expected NPV of the project if the option to abandon is considered.

Which of the following are usually known with a high level of confidence at the beginning of a project?

The holder of the patent on a new energy efficient,long lived light bulb that gives off a warm yellow light and does not contain mercury intends to manufacture and market it over the internet.Which of the following possibilities represent real options?