Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 22, Problem 14PS
Summary Introduction
To determine: The sensitivity analysis showing the value of abandonment put changes.
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_________________ the more sensitive the decision to the particular parameter being considered, i.e. small changes in the estimate could change the project decision from accept to reject.
a.
None of the options
b.
The Lower the sensitivity margin
c.
Lower or higher the sensitivity margin
d.
The higher the sensitivity margin
Consider the following statement about real options:
Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision.
True or False: The preceding statement is correct.
True
False
Which type of real option allows a project to be expanded if demand turns out to be greater than expected?
Expansion option
Flexibility option
Abandonment option
Timing option
Consider the following example:
King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company…
Would you expect an abandonment option to increase or decrease a project’sexpected NPV and risk (as measured by the coefficient of variation)? Explain.
Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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- The 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_forwardWhy is the original cost estimate corrected based on buyout data? What three types of project costs present the greatest risk to the project manager? What are project labor curves used for?arrow_forwardIf the decision is made by choosing the project with the higher IRR, how much value will be forgone?arrow_forward
- When you assign the highest anticipated sales and price and the lowest anticipated costs to a project, you are analyzing the project under the condition known as: base-case scenario analysis best-case sensitivity analysis worst-case sensitivity analysis best-case scenario analysis worst-case scenario analysisarrow_forwardc) Mr. Tim, the recently hired manager for this potential project is not convinced that using the IRR is sufficient to assess the project’s viability. Calculate the Modified Internal Rate of Return (MIRR) that should be used. d) Based off this MIRR, should the project be accepted? Explain why.arrow_forwardThe TELOS study that determines whether a project can be completed in an acceptable time frame isa. a schedule feasibility study.b. a time frame feasibility study.c. an on-time feasibility study.d. an economic completion feasibility study.e. a length of contract feasibility study.arrow_forward
- Indicate whether its True or False. Then write the explanation! The twin advantages with using the IRR method as opposed to the NPV method for project evaluation is that you don’t need to worry about what an appropriate risk- adjusted discount rate might be for the project and you will always get the correct answer to the investment decision.arrow_forwardBriefly review the sensitivity analysis that is presented in the case exhibits. Under what circumstances is this project financially attractive? What bets were the company making when they went ahead with the project? DO NOT HAVE TO PERFORM YOUR OWN SENSITIVITY ANALYSIS. YOU ARE TO INTERPRET THE SENSITIVITY ANALYSIS THAT IS GIVEN.arrow_forwardSuppose the net present values of projects A and B show a distribution as follows. a) Compare the projects by expected value criteria?b) Compare the projects by standard deviation criteria?c) Evaluate A and B projects according to the coefficient of variation criterion?Calculate on paper.arrow_forward
- Consider the following statement about real options: The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option. True or False: The preceding statement is correct. False True Which type of real option allows a firm to shut down a project if its cash flows are lower than expected? Investment timing option Flexibility option Abandonment option Growth option King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York…arrow_forwardMidland is a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviation A 12.0% 4.0% 2.9% B 12.5 5.0 3.2 C 13.0 6.0 3.5 D 12.8 4.5 3.0 Which project is least risky, judging on the basis of range? Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.arrow_forwardWhich of the following is not a variable when setting the project bid price. Multiple Choice Risk factor analysis. After-tax operating income. Salvage value. Capital spending. Additions to NWC.arrow_forward
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