Exam 13: Risk Analysis and Project Evaluation

Sensitivity analysis shows how the distribution of possible net present values is affected by a change in one input variable.

Approximately what percentage of new businesses survives their first year?

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?

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?

Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research in sets of 1,000 tubes.Fixed costs including depreciation associated with the project are $2,000,000,variable cost per set is $16.Excom expects to sell 250,000 sets.What is the minimum price it can charge and reach the accounting break-even point?

Accounting break-even analysis solves for the level of sales that will result in

Which of the following are reasons to analyse the risk of capital projects?

The consequences of excessive pessimism can be as harmful as the consequences of excessive optimism.

Webster Footwear believes that a new line of foul weather footwear they are planning to introduce this year will result in an NPV of $500,000 if the winter weather is exceptionally cold and wet,$400,000 if weather is normal,and $200,000 if winter is relatively warm and dry.The probability of a hard winter is 30%,an average winter is 50%,and a mild winter 20%.Compute the project's expected NPV.

Which of the following costs is NOT included in an accounting break-even analysis?

Scenario analysis is the form of risk analysis

Briefly distinguish between sensitivity analysis,scenario analysis,and simulation analysis.

________ 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.

If the worst case scenario for a project results in an NPV of zero,the project should be accepted.

Bill's Boat Charters forecasts indicate that if boat $500,000,net operating income will be $25,000 and if rentals equal $525,000,net operating income will be $37,500.What is Bill's degree of operating leverage?

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?