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

The variable cost per unit for a proposed project is $8.48 and the annual fixed costs are $27,400.These costs can vary by ± 5 percent.Annual depreciation is $13,290 and the tax rate is 21 percent.The sale price is $13.29 a unit,± 2 percent.If the firm bases its sensitivity analysis on the expected outcome,what will be the operating cash flow for a sensitivity analysis of 9,200 units?

Other than quantifying the potential NPV of a project,what other benefits do decision trees offer to managers?

An investment has an initial cash outflow of $210,000 for fixed assets that will be depreciated straight-line to zero over the 4-year life of the project.The sales price is $19.95 a unit,annual fixed costs are $237,000,the variable costs per unit are $8.87,and the tax rate is 23 percent.At what annual sales quantity will the investment break even on an accounting basis?

Discuss some potential shortcomings of the standard decision tree analysis.

In order to make a decision utilizing a decision tree,you must:

Consider the following statement by a project analyst: "I analyzed my project using scenarios for the optimistic,expected,and pessimistic cases.I computed break evens and conducted sensitivity and simulation analysis.I computed NPV,IRR,the profitability index,and payback.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 instinct." Critique this statement.

A project has a contribution margin of $15,projected fixed costs of $120,000,variable costs per unit of $12,annual depreciation of $61,000,and a projected present value break-even point of 13,601.20 units.The tax rate is 21 percent,the discount rate is 12 percent,and the project life is 3 years.What is the equivalent annual cost?

The potential decision to abandon a project has option value because:

The point where a project produces a rate of return equal to the required return is known as the:

CC's is analyzing a project with anticipated annual sales of 3,620 units,± 5 percent; a sales price of $24,± 2 percent; variable costs per unit of $14.60,± 4 percent; and annual fixed costs of $12,900,± 1 percent.What will be the annual total variable costs given a sensitivity analysis using a variable cost of $16 a unit?

Sensitivity analysis:

Assume a project with a life of one year has projected depreciation of $720,fixed costs of $6,000,and total sales of $11,760 at a sales quantity of 300 units.The variable cost per unit is $17.40.What is the accounting break-even level of production?

A project has estimated sales of 2,600 units at $15.40 per unit; variable costs per unit of $6.79,± 3 percent; annual fixed costs of $17,500,± 3 percent; and depreciation of $2,850 per year.The company bases its sensitivity analysis on the expected scenario.If a sensitivity analysis is conducted using a variable cost of $7,what will be the total annual variable costs?

The Highlight Company is reviewing a proposed 7-year project with an initial cost of $687,400.The annual fixed costs are $92,800,the variable cost per unit is $49.79,and the sales price per unit is $89.The tax rate is 21 percent and the discount rate is 12 percent.All assets are depreciated straight-line over the life of the project.What is the accounting break-even point in units per year?