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- Define (a) sensitivity analysis, (b) scenario analysis, and (c) simulation analysis. If GEwere considering two projects (one for $500 million to develop a satellite communications systemand the other for $30,000 for a new truck), on which would the company be morelikely to use a simulation analysis?Huang Industries is considering a proposed project whose estimatedNPV is $12 million. This estimate assumes that economic conditions will be “average.”However, the CFO realizes that conditions could be better or worse, so she performed ascenario analysis and obtained these results: Calculate the project’s expected NPV, standard deviation, and coefficient of variation.Your boss wants you to conduct a sensitivity and scenario analysis to determine whether the following project is a winner. You are entering an established market, and you know the market size will be 1,100,000 units. You are unsure of your exact market share, the price you will be able to charge, and your variable cost per unit, but have determined a range of possible values for each (in the table below). Your initial investment cost is $150 million, and that investment will depreciate in straight-line form over the 20-year life of the project. There are no new NWC requirements, and there will be no salvage value at the end of the 20 years. The tax rate is 35%. The discount rate is 18%. a) Use the following table to conduct a full sensitivity analysis for the project. Make sure to include the NPV for the expected outcome as part of the full sensitivity analysis. Also add the best- and worst-case scenarios to the full sensitivity analysis. Show all of your work (written out, not an…
- Consider the following information. In order to satisfy a sharp increase in demand due to the end of the pandemic, LLC is evaluating investing in one of two major projects; these projects will be called Project A and Project B. In order to mitigate risk, LLC has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $2.5m a fixed fee for her expert consulting services. Project A has an initial outlay of $45 million and Project B has an initial outlay of $60 million. Project A will generate additional revenues of $25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $75 million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of $35 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $90 million immediately, this working capital will…ou are considering setting up a firm to produce widgets. The cost of the project is $30 today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high, cash flows in t = 1 are $66 and when the demand is low, cash flows in t = 1 are $34. The discount rate is 10%. What is the NPV of the project? Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?Waste Management Inc. is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price will increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years, and there will be no salvage value. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? IRR? Would you accept this project? WACC 9.50% Net investment cost (depreciable basis) $100,000 Units sold 40,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. depr'n (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.33% Expected inflation 5.00% Tax rate 40.0% Please show work.
- MCS Corporation is considering two possible investments and needs your help in determining which will be the better financial option. Perform the necessary calculations using Microsoft Excel so that maximum precision can be obtained. (Unless indicated otherwise, enter your answers rounded to the nearest whole dollar/input code: 0). Investment Option "North" This potential investment is a little more risky and longer term, so it has a minimum rate of return of 17.60%. This investment would require an initial outlay of cash to purchase a piece of equipment for $131,000, and at the end of the 8- year life of this investment is expected to have a salvage value of $39,300. For each year of this investment, net annual cash inflows are expected to be $29,500. 1. How much is the present value of the purchase of equipment? 2. How much is the present value of the salvage value? 3. How much is the present value of the annual cash inflows? 4. How much is the Net Present Value? 5. What is the value…Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome Recession ($40 million) (24 million) 12 million 18 million Boom 0.05 34 million Calculate the project's expected NPV, standard deviation, and coefficient of variation. Enter your answers for the project's expected NPV and standard deviation in millions. For example, an answer of $13,000,000 should be entered as 13. Do not round intermediate calculations. Round your answers to two decimal places. Below average Average Above average E(NPV): ONPV: CV: million million 0.05 0.20 0.50 NPV 0.20A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $248, the sales price would be set at twice the VC/unit, and fixed costs are estimated at $357730. The investors will put up the funds if the project is likely to have an operating income of $406340 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the break-even formula, but include the required profit in the numerator.) Note: Answers should be whole numbers (no decimals) Answer:
- Your latest project involves the development of a death ray. Initial estimates predict that the project has a 50% chance of failure, with a potential loss of $1,000,000. However, you could hire an expert for $450,000. This is likely to reduce the chance of failure to 20% and the potential loss to $300,000. Questions: a) What is the dollar value of the net benefit of hiring the expert? Should you hire the expert? (Show all calculations for credit) b) As the skeptical accountant, do you have any concerns with this analysis? Be specific in order to receive creditAdam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC or cost of capital Net investment cost (depreciable basis) The salvage value of its equipment No other fixed assets will be acquired for following years The company will require an increase in net working capital at the $10,000 beginning The company will liquidate all working capital at the end of the project -10,000 Units sold (constant through years) 60,000 $30.00 $50,000 $17.00 Average price per unit, Year 1 Fixed operating…(Related to Checkpoint 13.2 and Checkpoint 13.3) (Comprehensive risk analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of $95 each, and the company analysts performing the analysis expect that the firm can sell 103,000 units per year at this price for a period of five years, after which time they expect demand for the product to end as a result of new technology. In addition, variable costs are expected to be $21 per unit and fixed costs, not including depreciation, are forecast to be $1,020,000 per year. To manufacture this product, Blinkeria will need to buy a computerized production machine for $9.7 million that has no residual or salvage value, and will have an expected life of five years. In addition, the firm expects it will have to invest an additional $309,000 in working capital to support the new business. Other…
