Exam 13: Risk Analysis and Project Evaluation

In the 4th year of project M,expected revenues will be $4,750,000,variable costs will be $4,000,000,depreciation expense $180,000,and fixed cash costs $570,000.Which of the following is true?

Use the following information to answer the following question(s). Destroya Extermination Services projects next year's sales of its new X-Ray termite inspection service at 5,000 inspections priced at $175 each.The variable costs per inspection are expected to be $87.50 Fixed cash costs are expected to be $90,000 and depreciation $110,000.The company's marginal tax rate is 34%.Destroya 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 free cash flow if the most likely estimates are used?

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?

Projects may appear to have less risk when real options are considered.

One advantage of simulation is that it can differentiate between unsystematic and systematic risk.

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.

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

Scenario analysis is the form of risk analysis

There is a 30% probability that an office building will be sold after 5 years for $30 million,a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in 5 years?

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

The consequences of excessive pessimism can be as harmful as the consequences of excessive optimism.

Real options can have the effect of

Use the following information to answer the following question(s). Destroya Extermination Services projects next year's sales of its new X-Ray termite inspection service at 5,000 inspections priced at $175 each.The variable costs per inspection are expected to be $87.50 Fixed cash costs are expected to be $90,000 and depreciation $110,000.The company's marginal tax rate is 34%.Destroya 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 free cash flow for the worst case scenario?

Which of the following is a reason why risk analysis is an important part of capital budgeting?

What are the consequences of excessive optimism or pessimism in forecasting expected project cash flows?

Boulangerie Bouffard expects to sell 1.25 million croissants next year for $1.50 each.Variable cost of a croissant is $0.80.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 34%.If the bakery can increase the price of a croissant to $1.75 sales will fall by 50,000 croissants.All other things equal,operating cash flow will increase or decrease

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 break even?

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

Sensitivity analysis shows how the distribution of possible net present values is affected by a change in one input variable.

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