Exam 9: Risk Analysis, Real Options, AMCQ Capital Budgeting

DK Markets expects a new project to produce sales of 9,600 units,±8 percent.The expected variable cost per unit is $17 and the expected fixed costs are $47,000.Cost estimates are considered accurate within a range of ±3 percent.The depreciation expense is $24,600.The sale price is estimated at $39 a unit,±2 percent.What is the amount of the fixed cost per unit under the pessimistic case scenario?

Conducting scenario analysis helps managers see the

In financial breakeven,the EAC is used to

Green Gardens is analyzing a proposed 5-year project that requires an investment of $77,000 in fixed assets and $17,400 in net working capital.The company uses straight-line depreciation over a project's life.Sales are estimated at 24,000 units ±3 percent.The expected variable cost per unit is $17,and the expected fixed costs are $39,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $36 a unit,±1 percent.The discount rate is 16 percent,and the tax rate is 35 percent.What is the net income under the pessimistic case scenario?

You are considering a project that has been assigned a discount rate of 12 percent.If you start the project today,you will incur an initial cost of $280 and will receive cash inflows of $350 a year for 3 years.If you wait 1 year to start the project,the initial cost will rise to $420 and the cash flows will increase to $385 a year for 3 years.What is the value of the option to wait?

To make a project accept/reject decision using a decision tree

The project defined by the following decision tree has a required discount rate of 17 percent. What is the Time 0 net present value of a successful test and investment?

The project defined by the following decision tree has a required discount rate of 14 percent. What is the Time 1 net present value of a successful investment?

A project has an accounting breakeven point of 3,800 units.The fixed costs are $3,208,and the projected variable cost per unit is $16.42.The project requires an initial investment in fixed assets of $840 that will be depreciated straight-line to zero over the 4-year life of the project.What is the projected sales price given a zero tax rate?

The investment timing decision relates to

A 6-year project has expected sales of 2,000 units,±4 percent.The expected variable cost per unit is $8,and the expected fixed costs are $9,800.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $22 a unit,±3 percent.The project requires an initial investment of $42,000 for equipment that will be depreciated straight-line to zero over the project's life.The equipment has a pretax salvage value of $5,000 at the end of the project.The project requires $2,600 in net working capital during its life.The discount rate is 9 percent,and tax rate is 30 percent.What is the net present value for the optimistic scenario?

Wilson's Antiques is considering a project that has an initial cost today of $14,000.The project has a life of 2 years with cash inflows of $9,500 a year.Should Wilson's decide to wait 2 years to commence this project,the initial cost will increase by 3 percent and the cash inflows will increase to $11,000 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?

In a decision tree,the accept/reject decision is dependent upon

A project has a contribution margin of $13.27,projected fixed costs of $78,900,projected variable cost per unit of $9,and a projected financial breakeven point of 16,230 units.The depreciation expense is $36,200,and the tax rate is 35 percent.What is the operating cash flow at this level of output?

If the option to abandon is ignored,the

Rizzo's is considering a project with a life of 5 years and an initial cost of $131,000.The discount rate for the project is 14 percent.The firm expects to sell 2,100 units a year.The cash flow per unit is $23.The firm will have the option to abandon this project after 3 years at which time it expects it could sell the project for $49,000.At what level of sales should the firm be willing to abandon this project?

A project with a current negative net present value

Miller Tools is considering a new project that requires an initial investment of $81,300 for fixed assets,which will be depreciated straight-line to zero over the project's 3-year life.The project is expected to have fixed costs of $37,600 a year,and a contribution margin of $18.40.The tax rate is 34 percent and the discount rate is 15 percent.What is the financial breakeven point?

Assume a project currently has a negative net present value.Which one of these expectations would indicate that the timing option for that project may have a positive value?

Nu-Tek is analyzing a proposed project with expected sales of 5,800 units,±6 percent.The expected variable cost per unit is $11 and the expected fixed costs are $15,600.Cost estimates are considered accurate within a range of ±4 percent.The depreciation expense is $5,700.The sale price is estimated at $21 a unit,±1 percent.What is the sales revenue under the pessimistic case scenario?