Exam 13: Risk Analysis and Project Evaluation

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?

An appropriate tool to analyse the interaction of various value drivers for Destroya Extermination Services would be

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?

The end result of a simulation analysis is

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?

Accounting break-even analysis uses

The NPV break-even point means that a company has covered its cost of capital.

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

Natick Nurseries has used scenario analysis to evaluate the purchase of a former dairy to use for nursery stock.The best case scenario produced a very favorable NPV of $4,000,000;the NPV of the most likely case was $2,000,000,but the worst case scenario resulted in an NPV of $(3,000,000)which would bring the company close to bankruptcy.Natick could improve its decision by

February sales for Ted's Variety Store equal $100,000,variable costs equal $60,000,fixed costs,including depreciation of $20,000,total $60,000.

Jake's Tree farm is evaluating a proposal to plant 5,000 ornamental trees at an initial cost of $10,000.The trees will be sold in 5 years.What is the minimum after tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%.

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?

Use the following information to answer the following question(s). Enrico,the owner of a pizza shop near a large university campus,is considering opening a shop specialising in quick,inexpensive take-away meals that are low in fat and calories.He will use a vacant space adjacent to the pizza shop.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%. -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%?

Frederick's Fish & Chips is evaluating a proposal to open a restaurant in Cairns.The restaurant will cost $29 million to open.Expected cash flows are $8 million per year for the first five years.At the end of 5 years,the Cains council will either revoke BD's permit and the restaurant will close,or renew the permit indefinitely.If the permit is revoked,the building and equipment can be sold for $10,000,000.If the permit is renewed,assume that the $8 million turns into a perpetuity.There is a 30% chance the permit will be revoked and a 70% chance it will be renewed.Compute the expected NPV of the project.Use a discount rate of 12%.

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 the number of units sold increases by 5% per year and prices remain flat.

The simulation approach provides us with

Sensitivity analysis is the form of risk analysis

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

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.Depreciation expense of $2,500,000 are included in fixed costs.The worst case forecast calls for sales of 240,000 valves,the best case for $290,400.Will MM reach cash break-even in the worst case scenario?

Variable cost for Light.com's fluorescent tubes is $12.50,and the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.$500,000 in depreciation expense is included in fixed costs.What is the cash break-even quantity for the fluorescent tubes?