Exam 13: Risk Analysis and Project Evaluation

List at least four typical value drivers that could seriously impact the outcome of a project.

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

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 bakery can increase the price of a croissant to $1.50 and all other variables remain the same, free cash flow will increase by

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.

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 markets's organizers. How many pies will she need to sell to cover her fixed costs?

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?

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?

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?

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

What is the expected NPV of the project with the option to expand if the probability of modest success is revised to 70% and great success to 30%?

An appropriate tool to analyze the interaction of various value drivers for Orange Electronics would be

The expected NPV of a project is the arithmetic average of best case, most likely case, and worst case scenarios.

Approximately what percentage of new businesses survive their first year?

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

What is the expected NPV of the project if the option to abandon is not considered?

Porter Climate Control is evaluating a proposal to move some manufacturing operations from an obsolescent plant in Illinois to a new facility in Mexico. The new facility will cost $58 million to open. and is expected to result in savings of $16 million per year for the first five years. At the end of 5 years, Porter will decide either to close the plant in Mexico or to keep it indefinitely. If Porter closes the plant, the building and equipment can be sold for $20,000,000. If the plant is kept, assume that the $16 million turns into a perpetuity. There is a 30% chance the plant will be closed and a 70% chance it will be kept. Compute the expected NPV of the project. Use a discount rate of 12%.

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

The option to abandon a project before the end of its forecasted life may increase its NPV.

Dudster company's DOL is 2. If sales increase by 10%, NOI will increase by 5%.

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