Exam 13: Risk Analysis and Project Evaluation

Jake's Tree farm is evaluating a proposal to plant 5,000 ornamental trees at an initial cost of $10,000.The trees will be sold in 5 years.What is the minimum after tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%.

The simulation approach provides us with:

The end result of a simulation analysis is:

Charlestown Marina's forecasts indicate that if slip rentals equal $500,000,net operating income will be $25,000 and if rentals equal $525,000,net operating income will be $37,500.What is Charletown's degree of operating leverage?

February sales for Ted's Variety Store equal $100,000,variable costs equal $60,000,fixed costs,including depreciation of $20,000,total $60,000.

Jeffrey believes that if he can make a good case for opening a new store in the chain for which he works,he will be promoted to manager.Can we be confident that Jeffrey's sales forecasts are accurate?

Excom Fiberoptics sell micro test tubes for biotechnology research in sets of 10,000 tubes.Fixed costs associated with the project are $2,000,000,variable cost per set is $120.Excom expects to sell 25,000 sets.What is the minimum price must it can charge and reach the accounting break-even point?

Cranston Plastic Packaging Solutions has run a simulation on a large project to produce eco-friendly packaging for personal hygiene products.The mean NPV is an impressive $8,000,000,but there is a 16% probability of a negative NPV and a 5% probability of an NPV worse than ($6,000,000).

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

Sensitivity analysis is the form of risk analysis:

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.Depreciation expense of $2,500,000 are included in fixed costs.The worst case forecast calls for sales of 240,000 valves,the best case for $290,400.Will MM reach cash break-even in the worst case scenario?

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.

Which of the following is a real option with respect to a capital budgeting decision?

Approximately what percentage of new businesses fail in their first year?

What is the approximate failure rate for new businesses after five years?

What is the expected NPV of the project with the option to expand?

Dudster company's DOL is 2.If sales increase by 10%,NOI will increase by 5%.

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

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.$500,000 in depreciation expense is included in fixed costs.What is the cash break-even quantity for the fluorescent tubes?

Accounting break-even means that the company is able to pay its interest expense and also the dividends shareholders were expecting.