CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 7, Problem 27QP
Sensitivity Analysis In Problem 26, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirements. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Explain the concept of sensitivity analysis as determined by NPV Breakeven sensitivity. How is it measured and what insights does it provide about the risk of a project?
Goal seek can be used to evaluate the NPV breakeven of an input. What needs to happen next in order to evaluate and interpret the results? How do we know whether the results suggest that an input adds a little, or a lot, of risk relative to a project?
Ajmal LLC a company based in ibri, and its Project management team has recently been completed the sensitivity analysis of their upcoming project at Fahud. The following are the results of the sensitivity analysis.
i) Initial investment sensitivity margin is 15%,
ii) Sales volume sensitivity margin is 12%,
iii) Selling price sensitivity margin is 8%,
iv) Variable cost sensitivity margin is 3%,
You are required to identify which two of the above variables, the Ajmal LLC management should pay particular attention.
a.
ii & iii
b.
I & ii
c.
None of the options
d.
i & iv
Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives,
Alternative
Expected
return
Standard deviation
A
21%
7.9%
B
24%
9.7%
C
17%
6.2%
D
13%
3.2%
a. Calculate the coefficient of variation for each alternative.
b. If the firm wishes to minimize risk, which alternative do you recommend? Why?
Chapter 7 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Decision Trees Ang Electronics. Inc., has...Ch. 7 - Decision Trees The manager for a growing firm is...Ch. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Financial Break-Even Niko has purchased a brand...Ch. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Project Analysis You are considering a new product...Ch. 7 - Project Analysis McGilla Golf has decided to sell...Ch. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Option to Wait Hickock Mining is evaluating when...Ch. 7 - Abandonment Decisions Allied Products, Inc., is...Ch. 7 - Prob. 24QPCh. 7 - Scenario Analysis You are the financial analyst...Ch. 7 - Scenario Analysis Consider a project to supply...Ch. 7 - Sensitivity Analysis In Problem 26, suppose youre...Ch. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Financial Break-Even The Cornchopper Company is...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose a new production method will be implemented if a hypothesis test supports the conclusion that the new method reduces the mean operating cost per hour. State the appropriate null and alternative hypotheses if the mean cost for the current production method is $220 per hour. What is the Type I error in this situation? What are the consequences of making this error? What is the Type II error in this situation? What are the consequences of making this error?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_forwardSelect all that are true with respect to comparing machines with unequal lives - i.e., choosing the best machine for the project. Group of answer choices If you simply estimate NPV without accounting for the different lives, NPV may lead to an incorrect decision You cannot use NPV to make this decision If you estimate NPV CORRECTLY, it will lead you to the correct decision One way to handle this type of decision, is to use what is called "equivalent annual cost" (EAC), which is essentially the all-in annual economic cost of the machine Estimate equivalent annual cost (EAC) by taking the NPV of the machine and dividing by its useful lifearrow_forward
- Industry is evaluating two different manufacturing systems (Alpha and Beta): Possible Outcome Probability Rate of Return Alpha System Rate of Return Beta System Optimistic .35 .40 .15 Most likely .45 .25 .30 Pessimistic .20 (.10) (.20) Which manufacturing system provides the lowest expected return? why? Alpha System Beta System Not enough informationarrow_forwardMetal manufacturing has isolated four alternatives for meeting for increased production capacity. The following summarized datea gathered relative to each of these alternatives. Alternative Expected Return Standard Deviation A 21% 8.3% B 25% 8.8% C 16% 6.1% D 13% 4.4% Calculate the coefficient of variation for each alternative If the firm wishes to minimize risk, which alternative do you recommend?arrow_forwardPrice and efficiency variances, benchmarking and ethics. Sunto Scientic manufactures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS, is assembled in a dedicated facility in Savannah, Georgia. Sunto is keenly aware of the competitive threat from smartphones that use Google Maps and has put in a standard cost system to manage production of the Magellan XS. It has also implemented a just-in-time system so the Savannah facility operates with no inventory of any kind. Producing the Magellan XS involves combining a navigation system (imported from Sunto’s plant in Dresden at a xed price), an LCD screen made of polarized glass, and a casing developed from specialty plastic.The budgeted and actual amounts for Magellan XS for July 2017 were as follows:arrow_forward
- In a company, the development and project team faced two opportunities, and evaluated each opportunity based on basic criteria and the results were Table 2:1 Comparison between opportunity A and opportunity B Standards Standard weight opportunity A opportunity B Consistency with the company's vision. 0.2 5 4 the expected cost. 0.15 4 5 Increase market share. 0.05 4 4 expected return. 0.1 2 3 advanced technology. 0.05 2 4 Expected time to start production. 0.15 4 5 Legislative approval. 0.1 2 5 product price. 0.2 5 4 Note 1: The chance can take a score from 1 to 5 on each criterion Note 2: The weight of the criterion has the relative importance of each criterion compared to the other criteria Based on the result of the comparison, what is the opportunity that the company is supposed to work on? Preparing a Request for Proposals Document (RFP): Before discussing the method of preparing a…arrow_forwardBased on the following sensitivity report, what would be the impact of changing the objective function coefficient for Product_1 to 11 and changing the objective function coefficient for Product_3 to 18? Applying the 100% rule, ______________ because the total change in the objective function coefficients _________________ 100%. first blank choices: A. the optimal solution will not change B. the optimal solution may change second blank choices: A. does exceed B. does not exceed Variable Cells Cell Name Final Value Reduced Cost Objective Coefficient AllowableIncrease AllowableDecrease $B$2 Product_1 0 −2 10 6 1E+30 $B$3 Product_2 175 0 13 1E+30 12 $B$4 Product_3 0 −1.5 13 7 1E+30 Constraints Cell Name Final Value Shadow Price Constraint R.H.Side AllowableIncrease AllowableDecrease $H$9 Resource_A 0 0 100 1E+30 100 $H$10 Resource_B 525 0 800 1E+30 275 $H$11 Resource_C 700 1.75 700 366.6666667 700arrow_forwardA Box Scorecard was prepared for a value stream: Required: 1. How many nonfinancial measures are used to evaluate performance? Why are nonfinancial measures used? 2. Classify the operational measures as time-based, quality-based, or efficiency-based. Discuss the significance of each category for lean manufacturing. 3. What is the role of the Planned Future State column? 4. Discuss the capacity category and explain the meaning of each measure and its significance. 5. Discuss the relationship between the financial measures and the measures in the operational and capacity categories.arrow_forward
- The following Box Scorecard was prepared for a value stream: Required: 1. How many nonfinancial measures are used to evaluate performance? Why are nonfinancial measures used? 2. Classify the operational measures as time-based, quality-based, or efficiency-based. Discuss the significance of each category for lean manufacturing. 3. What is the role of the Planned Future State column? 4. Discuss the capacity category and explain the meaning of each measure and its significance. 5. Discuss the relationship between the financial measures and the measures in the operational and capacity categories.arrow_forwardAs a manager, you have to choose between two options for new production equipment. Machine A will increase fixed costs by a substantial margin but will produce greater sales volume at the current price. Machine B will only slightly increase fixed costs but will produce considerable savings on variable cost per unit. No additional sales are anticipated if Machine B is selected. What are the relative merits of both machines, and how could you go about analyzing which machine is the better investment for the company in terms of both net operating income and break-even?arrow_forwardHudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Cost Accounting - Definition, Purpose, Types, How it Works?; Author: WallStreetMojo;https://www.youtube.com/watch?v=AwrwUf8vYEY;License: Standard YouTube License, CC-BY