Exam 13: Risk Analysis and Project Evaluation

Random,unforeseeable events can a significant impact on future cash flows.

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.The worst case forecast calls for sales of 240,000 valves,the best case for 290,400.Will MM reach accounting break-even in the worst case scenario?

The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as

A company that was most concerned about the impact of price changes in raw materials would use sensitivity analysis.

Use the following information to answer the following question(s). Tropical Soft Drinks is evaluating a proposal to install solar panels on the roof of its factory near San Juan.The panels will cost $150,000 per set.Depending on the price of electricity and the efficiency of the panels,the project will increase operating cash flows by either $50,000 per year or $75,000 per year.The useful life of the panels is 5 years.If early results indicate savings of $75,000 per year,four additional sets of panels will be installed immediately at the same cost with the same projected savings.The probability of either outcome is 50%.Use a discount rate of 10%. -What is the expected NPV of the project if the option to expand is not considered?

If the worst case scenario for a project results in an NPV of zero,the project should be accepted.

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 best case scenario?

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

Forecasts for project ST are shown above.Using a discount rate of 10%,the project has a positive NPV of $6,074.69.Estimate within $100 the level of sales revenue that will result in an NPV of $0.00.No other variables will change.

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 not sold?

Which of the following abilities are crucial for risk analysis?

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)for the best case scenario?

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.What is the break-even quantity for the fluorescent tubes?

What is the approximate five year survival rate for new businesses?

Using simulation provides the financial manager with a point estimate of an investment's net present value or internal rate of return.

Which of the following costs is NOT covered in an accounting break-even analysis?