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)
- The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?arrow_forwardSpencer Enterprises is attempting to choose among a series of new investment alternatives. The potential investment alternatives, the net present value of the future stream of returns, the capital requirements, and the available capital funds over the next three years are summarized as follows: Develop and solve an integer programming model for maximizing the net present value. Assume that only one of the warehouse expansion projects can be implemented. Modify your model from part (a). Suppose that if test marketing of the new product is carried out, the advertising campaign also must be conducted. Modify your formulation from part (b) to reflect this new situation.arrow_forwardMarket Fresh Foods is evaluating a new project to determine whether it warrants funding consideration. Having just taken over managing the project initiation process for Market Fresh from the previous project controller, Ray Bones is trying to evaluate the project's potential given its projected cash flows. As a first step, Ray developed the table of investment and revenue estimates below that he plans to use to determine the project's net present value. Market Fresh's CFO has indicated that, based on assumptions about risk during the course of the project, Ray should initially use 0.15 as a discount rate, but use 0.14 beginning in year 6. Assume all cash flows occur at the end of the specified year and calculate all values to three decimal places. if the problem has table data, copy the following lines and paste into the appropriate spot in the text section\footnotesize \baselineskip = 12pt\begin{tabular}{c | c}Investment & Revenue \\ \hline12.4 & 0 \\ 15.8 & 0 \\ 17.5…arrow_forward
- We considered two alternative designs for a new ride called the Scream Machine at a theme park in Florida. Design A had an initial cost of $300,000 and net annual after-tax revenues of $55,000; Design B had an initial investment of $450,000 and net annual after-tax revenues of $80,000. A 10% MARR was used over the 10-year planning horizon. Using sensitivity analysis, determine under what circumstances Design A will be preferred over Design B, and vice versa.arrow_forwardHow do I determine which is the correct answer for this problem? A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. Project A has average risk and an IRR = 9 percent. b. Project B has below-average risk and an IRR = 8.5 percent. c. Project C has above-average risk and an IRR = 11 percent. d. All of the projects above should be accepted. e. None of the projects above should be accepted. Please answer fast I give you upvote.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_forward
- A laboratory within Bayer is considering the five indivisible investment proposals below to further upgrade their diagnostic capabilities to ensure continued leadership and state-of-the-art performance. The laboratory uses a 10-year planning horizon, has a MARR of 10%, and a capital limit of $1,000,000. For the original opportunity statement: a. Which alternatives should be selected to form the optimum portfolio for the lab? b. What is the present worth for the optimum investment portfolio? c. What is the IRR for the portfolio?arrow_forwardOrchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to​forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the​ projects: Project Number Initial Capital​ ($) Number of Research Scientists NPV​ ($) I 10 2 10.1 II 15 3 19.0 III 15 4 22.0 IV 20 3 25.0 V 30 12  60.2 Given a wide variety of staffing​ needs, the company has also estimated the number of research scientists required for each development project​ (all cost values are given in millions of​ dollars). Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these​ projects? The profitability index for Project I is ___________________​(Round to two decimal​ places.) The profitability index for Project II is __________________________​ (Round to two decimal​ places.) The profitability index for…arrow_forwardAMT, Inc., is considering the purchase of a digital camera for the maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineer. The capital investment requirement is P345,000 and the estimated market value of the system after a six-year study period is P115,000. Annual revenues attributable to the new camera system will be P120,000, whereas additional annual expenses will be P7,000. The corporation's MARR is 20% per year. Show whether this is a desirable investment by using the ERR method.arrow_forward
- AMT, Inc., is considering the purchase of a digital camera for the maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineer. The capital investment requirement is P345,000 and the estimated market value of the system after a six-year study period is P115,000. Annual revenues attributable to the new camera system will be P120,000, whereas additional annual expenses will be P7,000. The corporation's MARR is 20% per year. Show whether this is a desirable investment by using the annual worth method.arrow_forwardAMT, Inc., is considering the purchase of a digital camera for the maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineer. The capital investment requirement is P345,000 and the estimated market value of the system after a six-year study period is P115,000. Annual revenues attributable to the new camera system will be P120,000, whereas additional annual expenses will be P7,000. The corporation's MARR is 20% per year. Show whether this is a desirable investment by using the present worth method.arrow_forwardAMT, Inc., is considering the purchase of a digital camera for the maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineer. The capital investment requirement is P345,000 and the estimated market value of the system after a six-year study period is P115,000. Annual revenues attributable to the new camera system will be P120,000, whereas additional annual expenses will be P20,000. The corporation's MARR is 20% per year. Show whether this is a desirable investment by using the Annual Worth Method (use capital recovery formula).arrow_forward
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