Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 11, Problem 28QP
Sensitivity Analysis [LO1] In Problem 27, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of
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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?
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 information
Are there conditions under which a firm might be better off if it were to choose a machine with a rapid traditional payback period, PB, rather than one with a larger NPV? Explain.
Chapter 11 Solutions
Fundamentals of Corporate Finance
Ch. 11.1 - Prob. 11.1ACQCh. 11.1 - What are some potential sources of value in a new...Ch. 11.2 - Prob. 11.2ACQCh. 11.2 - What are the drawbacks to the various types of...Ch. 11.3 - How are fixed costs similar to sunk costs?Ch. 11.3 - What is net income at the accounting break-even...Ch. 11.3 - Why might a financial manager be interested in the...Ch. 11.4 - If a project breaks even on an accounting basis,...Ch. 11.4 - If a project breaks even on a cash basis, what is...Ch. 11.4 - Prob. 11.4CCQ
Ch. 11.5 - What is operating leverage?Ch. 11.5 - How is operating leverage measured?Ch. 11.5 - Prob. 11.5CCQCh. 11.6 - What is capital rationing? What types are there?Ch. 11.6 - Prob. 11.6BCQCh. 11 - Prob. 11.1CTFCh. 11 - Marcos Entertainment expects to sell 84,000...Ch. 11 - Delta Tool has projected sales of 8,500 units at a...Ch. 11 - What is true for a project if that project is...Ch. 11 - A capital-intensive project is one that has a...Ch. 11 - Pavloki, Inc., has three proposed projects with...Ch. 11 - Forecasting Risk [LO1] What is forecasting risk?...Ch. 11 - Sensitivity Analysis and Scenario Analysis [LO1,...Ch. 11 - Prob. 3CRCTCh. 11 - Operating Leverage [LO4] At one time at least,...Ch. 11 - Operating Leverage [LO4] Airlines offer an example...Ch. 11 - Prob. 6CRCTCh. 11 - Prob. 7CRCTCh. 11 - Prob. 8CRCTCh. 11 - Prob. 9CRCTCh. 11 - Scenario Analysis [LO2] You are at work when a...Ch. 11 - Calculating Costs and Break-Even [LO3] Night...Ch. 11 - Prob. 2QPCh. 11 - Scenario Analysis [LO2] Sloan Transmissions, Inc.,...Ch. 11 - Sensitivity Analysis [LO1] For the company in the...Ch. 11 - Sensitivity Analysis and Break-Even [LO1, 3] We...Ch. 11 - Prob. 6QPCh. 11 - Prob. 7QPCh. 11 - Calculating Break-Even [LO3] In each of the...Ch. 11 - Calculating Break-Even [LO3] A project has the...Ch. 11 - Using Break-Even Analysis [LO3] Consider a project...Ch. 11 - Calculating Operating Leverage [LO4] At an output...Ch. 11 - Leverage [LO4] In the previous problem, suppose...Ch. 11 - Operating Cash Flow and Leverage [LO4] A proposed...Ch. 11 - Cash Flow and Leverage [LO4] At an output level of...Ch. 11 - Prob. 15QPCh. 11 - Prob. 16QPCh. 11 - Sensitivity Analysis [LO1] Consider a four-year...Ch. 11 - Operating Leverage [LO4] In the previous problem,...Ch. 11 - Project Analysis [LO1, 2, 3, 4] You are...Ch. 11 - Project Analysis [LO1, 2] McGilla Golf has decided...Ch. 11 - Prob. 21QPCh. 11 - Sensitivity Analysis [LO1] McGilla Golf would like...Ch. 11 - Break-Even Analysis [LO3] Hybrid cars are touted...Ch. 11 - Break-Even Analysis [LO3] In an effort to capture...Ch. 11 - Prob. 25QPCh. 11 - Operating Leverage and Taxes [LO4] Show that if we...Ch. 11 - Scenario Analysis [LO2] Consider a project to...Ch. 11 - Sensitivity Analysis [LO1] In Problem 27, suppose...Ch. 11 - Prob. 29QPCh. 11 - Prob. 30QP
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- 12 How can you use mean variance optimization to determine how much should be invested in illiquid investments? What variables would you need?arrow_forward12. Which of the following statements is CORRECT? Group of answer choices To find the MIRR, we discount the TV at the IRR. The discounted payback method eliminates all of the problems associated with the payback method. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides. A project's NPV profile must intersect the X-axis at the project's WACC. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.arrow_forwardWhat happens if we wish to increase a constraint RHS value beyond the allowable increase/decrease shown in your sensitivity analysis? a.no effect on the optimal solution b.the problem should be solved again to find the new optimal solution c.there will no longer be a feasible solution for the problem. d.we can still use the dual price of the original problem to get the new optimal objective function value.arrow_forward
- Which project below would you consider acceptable? One whose IRR is greater than the MARR One whose MARR is greater than the IRR O One whose RIC is less than the MARR One whose MARR is greater than the MIRRarrow_forward_________________ 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 marginarrow_forwardAssume that Allied’s average project has a coefficient of variation (CV) in the range of 1.25 to 1.75.Would the lemon juice project be classified as high risk, average risk, or low risk? What type of risk isbeing measured here?arrow_forward
- b) Using data provided below, compute appropriate values and fill the table below to help identify the least risky and most risky project among alternatives A, B and C using appropriate criteria. Project EV D D2 Var St. dev Coef.0f Var TT 12 0.2 A 18 0.7 28 0.1 10 0.3 В 22 0.6 32 0.1 11 0.1 C 21 0.8 31 0.1 Where n denotes the profit, P is the probability, EV stand for Expected value, D is the Deviation, D$ denote the deviation square, St. dev is the standard deviation and finally Coef.of Var is the coefficient of variation.arrow_forwardWhich of the following is FALSE regarding scenario and sensitivity analysis? Scenario analysis considers a best case (within reason) and worst case (within reason) scenario, along with a base case. () Scenario analysis focuses on stand-alone risk, since it doesn't consider the project as a part of the larger firm. Sensitivity analysis considers that the project is one part of a larger firm. Sensitivity analysis shows how changes in a single variable affects NPV or IRR. Scenario analysis assumes all variables take their worst (reasonable) values simultaneously, and best (reasonable) values simultaneously. Previous Page Next Page Page 21 of 3arrow_forwardIf a firm is planning for an international project, the manager should understand that the project's NPV would be ______ by the size of the initial investment and the project's required rate of return. A. positively; negatively B. positively; positively C. negatively; negatively D. negatively; positivelyarrow_forward
- If we are comparing projects of unequal sizes (requiring unequal amounts of investment), screening methods like NPV are only good for deciding if a product or service is worth considering along with other valid opportunities. In that case, we have to use a ranking method after screening the projects. How do we do that? For example, you have been given the following information: (n = 3; i = 10%) How will you rank these projects? Project R Project S Project T Investment required $13,000 $59,000 $89,000 Annual net cash flows $6,000 $25,000 $43,000 99arrow_forward8- Explain with a hypothetical numbers when the Internal Rate of Return (IRR) compared to the Net Present Value (NPV) is not a good measure to accept or reject a project.arrow_forward2) The expected return of Project Y is at least equal to the expected return of Project X, and the variance of Y is less than that of X. What would you do? A) Prefer Project Y B) Accept both projects C) Prefer Project X D) Reject both projects.arrow_forward
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