Exam 13: Risk Analysis and Project Evaluation

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 worst case scenario?

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

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.

________ is a method of quantifying uncertainty without having to estimate probabilities.

Garcia Developers will erect a small office building at a cost of $4,500,000.They have a client who will lease the space for 5 years at a price that will produce free cash flows of $150,000 per year.For approximately how much would they need to sell the building for at the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of this type.

Which of the following are usually known with a high level of confidence at the beginning of a project?

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.

The expected NPV of a project is simply the NPV calculated using the most likely estimates for costs and revenues.

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

The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January.It will cost them $5,000 per night for theater rental,event insurance and professional musicians.The theater will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to break even?

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 sold?

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

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.

Why is it important to perform risk analysis before accepting or rejecting major projects?

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

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

For a line of leaf blowers sold by Enviro Equipment,fixed costs,including depreciation of $1,000,000,total $2,400,000.The leaf blowers sell for $800 each.Variable costs of a snow blower are $500.Compute a.accounting break-even. b.cash break-even

What is the approximate failure rate for new businesses after five years?

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?

The Oviedo Drama Group is planning to present performances of their Adelaide Revue on 2 consecutive nights in January.It will cost them $5,000 per night for theater rental,event insurance and professional musicians.The theater will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organisation?