Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 10, Problem 20PS
Summary Introduction
To list: The extra steps needed to take the project’s Monte Carlo stimulation of the cash flows of the project.
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We discussed the use of sensitivity analysis and simulation analysis in the context of estimating cash flows for capital budgeting. Explain another context where cash flows must be estimated and these techniques could be used to measure estimation risk.
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Please show how to calculate the terminal cash flow of the project using the images attached.
Chapter 10 Solutions
Principles of Corporate Finance
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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- Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses? a. Monte Carlo simulation uses a computer to generate random sets of inputs, those inputs are then used to determine a trial NPV, and a number of trial NPVs are averaged to find the project's expected NPV. Sensitivity and scenario analyses, on the other hand, require much more information regarding the input variables, including probability distributions and correlations among those variables. This makes it easier to implement a simulation analysis than a scenario or sensitivity analysis, hence simulation is the most frequently used procedure. b. Differential project risk cannot be accounted for by using "risk-adjusted discount rates" because it is highly subjective and difficult to justify. It is better to not risk adjust at all. c. The firm's corporate, or overall, WACC is used to discount all project cash flows to…arrow_forwardCan you use the images attached to calculate the initial cash flow of the project. PLease explain how it is calculated as well.arrow_forwardAll parts are under one questions and per your policy therefore all parts can be answered. 1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. A. Concept or Definition Term A computer-generated probability simulation of the most likely outcome, given a set of probable future events The most likely scenario in a capital budgeting analysis A measure of the project’s effect on the firm’s earnings variability A method to determine market risk by using the betas of single-product companies in a given industry The risk that is measured by the project’s beta coefficient B. Marston…arrow_forward
- 1-Build an Excel Model to compute the NPV of investment project I or II and make sure that the model works (allows for changes in the inputs ,updates the output-NPV-and gives the same result). 2-Make your assumptions for a hypothetical project and compute the NPV. Then, show how NPV would change when you change specific inputs (ceteris paribus). Do this analysis for at least 3 inputs using scenario analysis or data tables, assigning different values to each input.arrow_forwardIn a few sentences, answer the following question as completely as you can. Compare discounted cash flow (DCF) and non-discounted cash flow capital budgeting techniques. If you were to evaluate a project, which one of these techniques would you use?arrow_forwardProject Appraisal and Financing. We have studied the subject under the following headings . Please prepare a flowchart or a table where the features get highlighted. The purpose is to establish that you have understood the concepts in a broad manner. Selection of Project Time Value of Money Investment Criteria Project cash flows Project Risk Analysis Financing of Projectarrow_forward
- Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. b. The NPV of a relatively low-risk project should be found using a relatively high WACC. c. If a project's NPV is less than zero, then its IRR must be less than the WACC. d. The lower the WACC used to calculate it, the lower the calculated NPV will be. e. If a project's NPV is greater than zero, then its IRR must be less than zero.arrow_forwardYou can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term A computer-generated probability simulation of the most likely outcome, given a set of probable future events The most likely scenario in a capital budgeting analysis A measure of the project’s effect on the firm’s earnings variability The risk that is measured by the project’s beta coefficient A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open a location in the United States. The study showed that the best place for the company to open its first location would be in Chicago. When conducting its capital budgeting analysis, how should…arrow_forwardPlas construct also a cash flow diagram for the problem, thank youarrow_forward
- Write the solution including the CASH FLOW DIAGRAMarrow_forwardHow to determine the initial investment if I have the flows, of the npv and the irrarrow_forward(a) Calculate the payback period for each project. (b) Calculate the net present value (NPV) for each project. (c) Calculate the profitability index of each project. (d) Explain to the company which project should be implemented. Support your answer.arrow_forward
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