Exam 13: Risk Analysis and Project Evaluation

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

Angie's Sub Shop expects to sell 200,000 subs next year at an average price of $5.00.Variable cost of a sub is $3.00.Cash fixed costs are $85,000,depreciation $95,000 and the tax rate is 25%.If the price increases to $5.50 and all other variables remain the same,how much will free cash flow increase?

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

A would be entrepreneur is considering buying a franchise from a national chain of fitness centers.Identify some of the risks she might face.

Use the following information to answer the following question(s). Enrico,the owner of a pizza parlor near a large university campus,is considering opening a shop specializing in quick,inexpensive take-out meals that are low in fat and calories.He will use a vacant space adjacent to the pizza parlor.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%. -What is the NPV of the project if it is expanded?

Actual 2014 figures and forecasted 2015 figures are shown below for HEMOPath Labs. Compute Compute HEMOPath's degree of operating leverage (DOL).

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

Pederson Home Heating Inc.anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild,$1,000,000 if winter is average,and $1,500,000 if winter is exceptionally cold.The probability of an average winter is 60%,while the probability of either a mild or an exceptionally cold winter is 20%.What is Pederson's expected cash flow from fuel sales next winter?

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL)?

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

When evaluating projects with real options,businesses must consider the probability that the option will be exercised.

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.

Chevre Imported Cheese Inc.forecasts that if sales revenue for next year is $1,250,000,net operating income will be $100,000 and if sales revenue is $1,000,000,net operating income will be $80,000.Chevre's degree of operating leverage is

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?

Project Zeta is expected to produce after-tax cash flows of $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?

The NPV break-even point means that a company has covered its cost of capital.

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?

The expected NPV of a project is simply the NPV calculated using the most likely estimates for costs and revenues.

Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research in sets of 1,000 tubes.Fixed costs including depreciation associated with the project are $2,000,000,variable cost per set is $16.Excom expects to sell 250,000 sets.What is the minimum price it can charge and reach the accounting break-even point?

A project's internal rate of return and the company's required rate of return were both exactly 12%,therefore the project's NPV was greater than $0.00.