Exam 13: Risk Analysis and Project Evaluations

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

The pure play method attempts to identify publicly traded firms that are engaged solely in the same business as the project or division.

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

Buttercrumbs Bakery expects to sell 1 million scones next year for $1.25 each.The variable cost of a scone 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 scone to $1.50 and all other variables remain the same, free cash flow will increase by [blank].

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

Real options can have the effect of

There is a 30% probability that an office building will be sold after five 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 five years?

Briefly describe the five steps in performing a simulation analysis.

Risk-adjusted discount rate is based on the notion that investors require higher rates of return on more risky projects.

The end result of a simulation analysis is

What is the expected NPV of the project if the option to abandon is considered?

Australian Fireplaces expects to sell 1200 gas fireplaces in 2019 at an average price of $2400 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 2021 if the number of units sold increases by 5% per year and prices remain flat.

Future Pharmaceuticals believes that changes in health insurance may increase demand by as much as 10%, but also lower prices by as much as 10%.It is also concerned that the cost of materials may increase as much as 10% and the company may or may not be able to pass these higher costs on to its customers.To estimate expected, best case and worst case results, Future should use [blank].

Approximately what percentage of new businesses survive their first year?

[blank] is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

When using simulation to analyze a large capital project, the decision rule is:

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

What is the expected NPV of the project if the option to expand is considered?

What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?

According to the capital asset pricing model, scenario risk is the only relevant risk for capital-budgeting purposes.