qbus5001
CHAPTER 10
Project Analysis
Answers to Problem Sets
1. a. False. The capital budget is not the final sign-off for specific projects. Most companies require for each project appropriation requests, which include more detailed analysis.
b. True. Strategic planning requires consideration of alternatives.
c. True. Cash flow forecasts are regularly overstated.
Est. Time: 01 - 05
2.
3. a. Analysis of how project profitability and NPV change if different assumptions are made about sales, cost, and other key variables
b. Project NPV is recalculated by changing several inputs to new, but consistent, values.
c. Determines the level of future sales at which project profitability or NPV equals zero.
d. An extension of sensitivity analysis that explores all possible outcomes and weights each by its probability
e. A graphical technique for displaying possible future events and decisions taken in response to those events
f. Option to modify a project at a future date
g. The additional present value created by the option to bail out of a project and recover part of the initial investment if the project performs poorly.
h. The additional present value created by the option to invest more and expand output if a project performs well Est. Time: 06 - 10
4.
5. a. Describe how project cash flow depends on the underlying variables.
b. Specify probability distributions for forecast errors for these cash flows.
c. Draw from the probability distributions to simulate the cash flows. Est. Time: 01 - 05
6.
7. Adding a fudge factor to the discount rate pushes project analysts to submit more optimistic forecasts.
Est. Time: 01 - 05
8.
9. a.
= $2,584.67.
$7,560.
b. $2,110.19.
$1,000.
c. The 18% discount rate would give an approximation to the correct NPVs for projects with all (or most) of the inflows
Project Analysis
Answers to Problem Sets
1. a. False. The capital budget is not the final sign-off for specific projects. Most companies require for each project appropriation requests, which include more detailed analysis.
b. True. Strategic planning requires consideration of alternatives.
c. True. Cash flow forecasts are regularly overstated.
Est. Time: 01 - 05
2.
3. a. Analysis of how project profitability and NPV change if different assumptions are made about sales, cost, and other key variables
b. Project NPV is recalculated by changing several inputs to new, but consistent, values.
c. Determines the level of future sales at which project profitability or NPV equals zero.
d. An extension of sensitivity analysis that explores all possible outcomes and weights each by its probability
e. A graphical technique for displaying possible future events and decisions taken in response to those events
f. Option to modify a project at a future date
g. The additional present value created by the option to bail out of a project and recover part of the initial investment if the project performs poorly.
h. The additional present value created by the option to invest more and expand output if a project performs well Est. Time: 06 - 10
4.
5. a. Describe how project cash flow depends on the underlying variables.
b. Specify probability distributions for forecast errors for these cash flows.
c. Draw from the probability distributions to simulate the cash flows. Est. Time: 01 - 05
6.
7. Adding a fudge factor to the discount rate pushes project analysts to submit more optimistic forecasts.
Est. Time: 01 - 05
8.
9. a.
= $2,584.67.
$7,560.
b. $2,110.19.
$1,000.
c. The 18% discount rate would give an approximation to the correct NPVs for projects with all (or most) of the inflows