Exam 13: Risk Analysis and Project Evaluation

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%.

Which of the following abilities are crucial for risk analysis?

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)if the most likely estimates are used?

Rheem Manufacturing Co.anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild,$1,000,000 if winter is average,and $1,500,000 if winter is exceptionally cold.The probability of an average winter is 60%,while the probability of either a mild or an exceptionally cold winter is 20%.What is Rheem's expected cash flow from fuel sales next winter?

Which of the following is a real option with respect to a capital budgeting decision?

If Untel Inc.decides to manufacture a new generation of computer chips with a brief 2-year product life cycle,it expects to sell 1 million units each year.Variable cost per unit will be $75,fixed costs $5 million,and depreciation $3 million.The initial investment will be $22.91 million.Untel uses a discount rate of 10%;its marginal tax rate is 40%.To reach break-even NPV,UNTEL must sell the chips for at least ________ each.

A would be entrepreneur is considering buying a franchise from a national chain of fitness centers.Identify some of the risks she might face.

Economists at PHE Llc estimate a 20% probability of a recession next year,a 50% probability of an average economy,and a 30% probability of a rapid expansion.If there is a recession,the NPV of project O will be $20 million;if the economy is average,it will be $45 million and in case of a rapid expansion,it will be $75 million.What is the expected NPV of the project?

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

Accounting break-even means that the company is able to pay its interest expense and also the dividends shareholders were expecting.

Net present value break-even is reached

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

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 NPV of the project if it is expanded?

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 market's organizers.How many pies will she need to sell to cover her fixed costs and realize a $3,000 profit?

Project Zeta is expected to produce after-tax cash flows of $30 million in year 1,$40 million in year 2,and $50 million in year 3.If the company uses a 12% required rate of return,what is the most it can invest in this project and break even with respect to NPV?

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL)?

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?

Real options are traded on an exchange.

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

Real options are traded on both the Australian Securities Exchange (ASX)and Australian Capital Board Options Exchange (ACBOE).