a)
To explain: The sensitivity analysis.
Introduction:
Sensitivity Analysis:
The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in
Scenario Analysis:
The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.
Simulation Analysis:
Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.
b.
To explain: The scenario analysis
Introduction:
Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.
c.
To explain: The simulation analysis and the project on which the simulation will be applied.
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Chapter 12 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
- Your company, Kitchen Works, is employing the SDLC for its new information system. The company is currently performing a number of feasibility studies, including the economic feasibility study. A draft of the economic feasibility study has been presented to you for your review. You have been charged with determining whether only escapable costs have been used, the present value of cash flows is accurate, the one-time and recurring costs are correct, realistic useful lives have been used, and the intangible benefits listed in the study are reasonable. Although you are a member of the development team because of your strong accounting background, you have questions about whether some costs are escapable, the interest rates used to perform present value analysis, and the estimated useful lives that have been used. How might you resolve your questions?arrow_forwardHuang 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.arrow_forwardImagine that you have been tasked with evaluating the future investment of equipment for a company. To make an effective decision you will likely consider various capital budgeting techniques such as the cash payback technique, internal rate of return (IRR), annual rate of return (ARR), and the net present value (NPR) methods. Which method are you most likely to use to evaluate future investments and which are you least likely to use?arrow_forward
- Suppose that, for an engineering project, the optimistic, most likely, and pessimistic estimates are as shown in the accompanying table. Develop a spreadsheet to determine the AW for each of the three estimate conditions. It is thought that the most critical elements are useful life and net annual cash flow. Include in your spreadsheet a table showing the AW for all combinations of the estimates for these two factors, assuming that all other factors remain at their most likely values.arrow_forwardA company is considering three alternative Investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects Present value of net cash flows (excluding initial investment) Initial investment Complete this question by entering your answers in the tabs below. a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will It accept? c. If the company can choose only one project, which will it choose on the basis of net present value? Required A Required B Compute the net present value of each project. Potential Projects Project A Present value of net cash flows Initial investment Net present value Required C Project E Project C $10,685 (10,000)arrow_forwardA financial analyst is evaluating the following projects, which are mutually exclusive, meaning that only one of them can be chosen. Based on financial theory and the NPV criterion, which one of these projects should be chosen over the other three? Time A C D -26,000 -7,200 -14,500 -19,600 8,100 11,900 8,100 2,360 8.600 1,150 10,000 2,120 5,700 800 11,100 11,00O0 4,200 850 1,130 9,800 12,480 9,700 830 11,600 Discount 13.9% 13.9% 13.9% 13.9% Rate O Project A O Project B O Project C O Project D O12 345arrow_forward
- I need solutions for questions d, e, f, g, h and i. Thanks d. Are this project’s cash flows likely to be positively or negatively correlated withreturns on Cory’s other projects and with the economy, and should this matter in youranalysis? Explain.e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines thatwill upgrade its manufacturing plant. These machines are considered average-riskprojects, so management will evaluate them at the firm’s 10% WACC. Machine Xhas a life of 4 years, while Machine Y has a life of 2 years. The cost of each machineis $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. Themanufacturing plant is very successful, so the machines will be repurchased at the endof each machine’s useful life. In other words, the machines are “repeatable” projects.1. Using the replacement chain method, what is the NPV of the better machine?2.…arrow_forwardThe management recognizes that the present worth of the cogeneration plant is quite sensitive to the savings in electricity costs, the MARR, and the initial costs. Since there is some uncertainty about these estimates, the company wants to explore further the impact of changes in these parameters on the viability of the project. You are to carry out a break-even analysis for each of these parameters to find out what range of values results in a viable project (i.e., PW > 0) and to determine the “break-even” parameter values that make the present worth of the project zero. How much of a drop in the cost of natural gas will result in the heat exchange units having a present worth of zero? Construct a break-even graph to illustrate this break-even costarrow_forwardDuraTech Manufacturing is evaluating a process improvement project. The estimated receipts and disbursements associated with the project are shown below. MARR is 6%/yr. Solve, a. What is the internal rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on internal rate of return? c. Should DuraTech implement the proposed process improvement?arrow_forward
- Imagine that you have been tasked with evaluating the future investment of equipment for a company. To make an effective decision you will likely consider various capital budgeting techniques such as the cash payback technique, internal rate of return (IRR), annual rate of return (ARR), and the net present value (NPR) methods. Discuss which method you are most likely to use to evaluate future investments and which you are least likely to use.arrow_forward. Suppose that your organization wants to decide which one of the given two projects can be        selected for the development, as summarized in the following table.                                                     Calculate the Expected Monetary Value (EMV) for each project and suggest which         project can be selected?                        Probability of occurrence of risk/opportunity (Impact) Estimated Profits/Losses Project 1 40% $140000  60% -$60000 Project 2 80% $40000  20% -$8000arrow_forwardYou are analyzing a project and have prepared the following data: a. Based on the net present value of this project, should you reject or accept this project? (Please provide the formulas for calculation or the keys applied if a financial calculator is used) b. What is the internal rate of return (IRR) of this project? Should you reject or accept this project? (Please use a financial calculator and list the keys you use)arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning