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Exam 10: Project Analysis

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Question 1

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Briefly explain timing options.

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Companies with positive-NPV projects need not undertake them right away. If there are uncertainties associated with the project, costly mistakes might be avoided by waiting to resolve them. These types of options to postpone investment are called timing options.

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Why is sensitivity analysis less realistic than Monte Carlo simulation?

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Sensitivity analysis only changes one va...

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Monte Carlo simulation should be used to get the distribution of NPV values for a project.

The Taj Mahal Tour Company proposes to invest $3 million in a new tour package project.Fixed costs are $1 million per year.The tour package costs the company $500 to produce and can be sold at $1,500 per package to tourists.This tour package will last for the next five years.If the cost of capital is 20 percent, what is the NPV break-even number of tourists per year? (Ignore taxes.Round to the nearest 1,000.)

The following are drawbacks of sensitivity analysis except

Firms that operate at break-even on an accounting profit basis are really losing the opportunity cost of capital on their investments.

A project requires an initial investment of $150.Your research generates the following estimates of revenues and costs (there are no taxes) : $\begin{array} { | l | c | c | c | } \hline & \text { Pessimistic } & \text { Mast Likely } & \text { Optimistic } \\\hline \text { Revenues } & \mathbf { 3 0 } & \mathbf { 5 0 } & \mathbf { 6 5 } \\\hline \text { Costs } & 20 & 20 & 15 \\\hline\end{array}$ The cost of capital equals 10 percent.Assume that the cash flows occur in perpetuity.Conduct a sensitivity analysis of the project's NPV to variations in costs.(Answers appear in order: [Pessimistic, Most Likely, Optimistic].)

The accounting break-even point occurs when

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0) .You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60 percent of revenues.(Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]) .The equipment depreciates using straight-line depreciation over three years.At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30 percent and the cost of capital is 15 percent.What is the NPV of the project if the revenues were higher by 10 percent and the costs were 65 percent of the revenues?

The NPV break-even point occurs when

You are given the following net future values for harvesting trees from a plot of forestland.(This is a one-time harvest.) $\begin{array} { l c c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\\text { Net Future Value } & 100 & 125 & 150 & 175 & 195 & 210\end{array}$ If the cost of capital is 15 percent, calculate the optimal year to harvest.

After completing a project analysis, an analyst should rely on which tool to make a final recommendation on the project?

Which of the following simulation outputs is likely to be most useful and easy to interpret? The output that shows the distribution(s) of the project's

Tangible assets usually have higher abandonment values than intangible ones.

Which of the following statements most appropriately describes scenario analysis?

One can employ simulation models to

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0) .You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60 percent of revenues.(Assume all revenues and costs occur at year-end [i.e., t = 1, t = 2, and t = 3]) .The equipment depreciates using straight-line depreciation over three years.At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30 percent and the cost of capital is 12 percent. Calculate the NPV of the project.

How do managers supplement the NPV analysis of a project to gain a better understanding of a project?

Briefly discuss the usefulness of Monte Carlo simulation in project analysis.

Projects with higher fixed costs have lower break-even points.