Exam 13: Risk Analysis and Project Evaluation

Brookfield Heavy Equipment is considering a project that will produce after tax cash of $40,000 per year for 5 years. The project will require an initial investment of $144,191. At what discount rate will the project reach break-even NPV?

Simulation analysis is basically a form of scenario analysis in which a great many scenarios are examined to produce a probability distribution of possible outcomes.

Cash break-even NPV does not include depreciation as an expense.

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 by

Accounting break-even analysis uses

What is the expected free cash flow if the most likely estimates are used?

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

What is the NPV of the project if first year savings are only $75,000 and the project is not sold?

The end result of a simulation analysis is

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

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

An important value driver for an automobile dealership would be

What is the expected free cash flow for the worst case scenario?

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.

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 reason why risk analysis is an important part of capital budgeting?

Real options are derivative securities that derive their value from the value of the underlying projects.

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

DNATECH has developed a hair growth treatment at a cost of $10 million. They can license the technology to another company for a period of 10 years. What is the minimum annual free cash flow they could accept in order to reach break-even NPV on this product? Use a discount rate of 8%.

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?