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Exam 7: Risk Analysis, Real Options, and Capital Budgeting

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Question 21

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An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even

F) B) and D)
G) A) and B)

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Question 22

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What is the benefit of scenario analysis if it does not produce an accept or reject decision for a proposed project?

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Scenario analysis provides management wi...

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Question 23

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A project has a contribution margin of $5, projected fixed costs of $10,000, a projected variable cost per unit of $12, and a projected present value break-even point of 6,000 units.What is the operating cash flow at this level of output?

Wilson's Antiques is considering a project that has an initial cost today of $10,000.The project has a two-year life with cash inflows of $6,500 a year.Should Wilson's decide to wait one year to commence this project, the initial cost will increase by 5% and the cash inflows will increase to $7,500 a year.What is the value of the option to wait if the applicable discount rate is 10%?

Fixed costs: I.are variable over long periods of time. II.must be paid even if production is halted. III.are generally affected by the amount of fixed assets owned by a firm. IV.per unit remain constant over a given range of production output.

Simulation analysis is based on assigning a _____ and analyzing the results.

Which of the following statements are correct concerning the present value break-even point of a project? I.The present value of the cash inflows equals the amount of the initial investment. II.The payback period of the project is equal to the life of the project. III.The operating cash flow is at a level that produces a net present value of zero. IV.The project never pays back on a discounted basis.

Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case, best case, and worst case.I computed break-evens and degrees of operating leverage.I did sensitivity analysis and simulation analysis.I computed NPV, IRR, payback, AAR, and PI.In the end, I have over a hundred different estimates and am more confused than ever.I would have been better off just sticking with my first estimate and going by my gut reaction." Critique this statement.

Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?

All else constant, as the variable cost per unit increases, the:

Ralph and Emma's is considering a project with total sales of $17,500, total variable costs of $9,800, total fixed costs of $3,500, and estimated production of 400 units.The depreciation expense is $2,400 a year.What is the contribution margin per unit?

Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions.Discuss why and how scenario analysis is used in addition to sensitivity analysis.

As the degree of sensitivity of a project to a single variable rises, the:

Variable costs:

All else equal, the contribution margin must increase as:

Sensitivity analysis provides information on:

A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units.Depreciation is $7,500. What is the variable cost per unit?

Which one of the following is most likely a variable cost?

Fixed costs:

The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options.Explain three different real or managerial options that management may have, what they are, and how they would influence market value.