Exam 13: Risk Analysis and Project Evaluation

Which of the following are reasons to analyze the risk of capital projects?

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?

Betty Gilmore plans to sell berry pies at a local farmer's market.The permit and space rental will cost her $2,000 for the June through August season.The pies will sell for $7.00.Ingredients and overhead average $4.00 per pie.She also has to pay five percent of her gross sales to the market's organizers.How many pies will she need to sell to cover her fixed costs?

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?

Accounting break-even analysis uses

Use the following information to answer the following question(s). Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%. -What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?

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

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

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

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 number of croissants sold increases by 10%,and all other variables remain the same,how much will free cash flow increase?

Which of the following is NOT a typical real option in capital budgeting?

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

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if both price and the number of units sold increase by 5% per year.

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).

Why is it important to perform risk analysis before accepting or rejecting major projects?

Approximately what percentage of new businesses survive their first year?

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

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

Garcia Developers will erect a small office building at a cost of $4,500,000.They have a client who will lease the space for 5 years at a price that will produce free cash flows of $150,000 per year.For approximately how much would they need to sell the building for at the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of this type.

Use the following information to answer the following question(s). An alternative energy project will cost $300,000.Depending on the price of electricity,the project will create after-tax savings of either $100,000 per year for 5 years or $75,000 per year for 5 years.If first year savings are only $75,000,the project can be sold at the end of the first year for $250,000.Use a discount rate of 10%. -What is the NPV of the project if first year savings are only $75,000 and the project is sold?