Project Analysis Slides by Matthew Will.

Slides:

Advertisements

Similar presentations

Chapter 10 Learning Objectives

Advertisements

1 Financiering Jeroen E. Ligterink 2001.

Capital Budgeting. Cash Investment opportunity (real asset) FirmShareholder Investment opportunities (financial assets) InvestPay dividend to shareholders.

Session 7 Topics to be covered: Capital Budgeting 101

Chapter 9 Project Analysis Chapter Outline

CORPORATE FINANCIAL THEORY Lecture 3. Interest Rate Cash Flow Interest Rate and Cash Flow - REALITY Is not guaranteed Has many different sources.

Real Options The Right to do Something Real. Introduction The classical DCF valuation method involves a comparison between the cost of an investment project.

Incremental Cash Flows

A Project Is Not a Black Box Chapter 10. Topics Covered  Sensitivity Analysis  Break Even Analysis  Monte Carlo Simulation  Decision Trees.

The McGraw-Hill Companies, Inc., 2000

10- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.

4. Project Investment Decision-Making

Chapter 10 Project Analysis

Capital Budgeting & Risk Invest in highest NPV project Need Discount rate to get NPV.

Project Analysis and Evaluation

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 11 Project Analysis and Evaluation.

FINANCE 7. Capital Budgeting (2) Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2007.

Warm-up Problems Consider the oil well example. P(rich)=0.5. Now assume the test is not perfect: P(test - | rich) = 0.1 and P(test + | poor) = 0.3. What.

1 Copyright 1996 by The McGraw-Hill Companies, Inc WHAT DISCOUNT RATE SHOULD THE FIRM USE IN CAPITAL BUDGETING?  MANY FIRMS USE OVERALL FIRM COST OF CAPITAL.

1 Applying Simulation to Decision Problems. 2 Monte Carlo simulation: A simple example Cash inflows Probability outflows Probability ($) (%) ($) (%) 50.

Key Concepts and Skills

Copyright © 2003 McGraw Hill Ryerson Limited 8-1 prepared by: Carol Edwards BA, MBA, CFA Instructor, Finance British Columbia Institute of Technology Fundamentals.

Engineering Systems Analysis for Design Richard de Neufville  Massachusetts Institute of Technology Use of Simulation Slide 1 of 19 Use of Simulation.

Fundamentals of Corporate Finance, 2/e ROBERT PARRINO, PH.D. DAVID S. KIDWELL, PH.D. THOMAS W. BATES, PH.D.

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 11 Project Analysis and Evaluation.

Ch11. Project Analysis and Evaluation. 1) Scenario and other what-if analyses Actual cash flows and projected cash flows. Forecasting risks (estimation.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Making Capital Investment Decisions Chapter Ten.

Chapter 11 Project Analysis and Evaluation Homework: 19, 25 & 26.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Project Analysis and Evaluation Chapter Eleven.

Chapter McGraw-Hill Ryerson © 2013 McGraw-Hill Ryerson Limited Project Analysis and Evaluation Prepared by Anne Inglis 11.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Project Analysis and Evaluation Chapter Eleven Prepared by Anne Inglis, Ryerson University.

1 Practical Problems in Capital Budgeting Lecture 3 Fall 2010 Advanced Corporate Finance FINA 7330 Ronald F. Singer.

Chapter 9 Project Analysis Fundamentals of Corporate Finance

Risk Analysis, Real Options, and Capital Budgeting

A project is not a black box

Chapter 10 Principles of Corporate Finance Eighth Edition A Project is Not A Black Box Slides by Matthew Will Copyright © 2006 by The McGraw-Hill Companies,

CORPORATE FINANCE III ESCP-EAP - European Executive MBA 24 Nov a.m. London Project Appraisal-Dealing with uncertainty I. Ertürk Senior Fellow in.

 Introduction to Risk, Return, and the Opportunity Cost of Capital Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will.

F305 Intermediate Corporate Finance Indiana University Class 5.

A Project Is Not a Black Box Principles of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Lu Yurong Chapter 10 McGraw Hill/Irwin.

Decision Trees Dr. Ron Lembke Operations Management.

Chapter 11 Project Analysis and Evaluation McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

11 0 Project Analysis and Evaluation. 1 Key Concepts and Skills  Understand forecasting risk and sources of value  Understand and be able to do scenario.

© 2012 McGrawHill Ryerson Ltd.Chapter ..and Possible Solutions ◦ Sensitivity Analysis  Analysis of the effects of changes in sales, costs, etc.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Corporate Finance 3e Ross, Thompson, Christensen, Westerfield and Jordan Slides.

Capital Budgeting.

Chapter 8 Valuation Exhibits October 22, CAS-COD-Prez-Date-CTL Confidential 2.

9-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield & Jordan.

Chapter 22 Principles of Corporate Finance Tenth Edition Real Options Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies,

12/4/2015 Vijit Mittal (NBS, Gr. Noida) 1 Monte Carlo Simulation,Real Options and Decision Tree.

Chapter 11 Principles PrinciplesofCorporateFinance Ninth Edition Project Analysis Slides by Matthew Will Copyright © 2008 by The McGraw-Hill Companies,

10 Project analysis McGraw-Hill/Irwin

Lecture 03.0 Project analysis Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin.

FIN 614: Financial Management Larry Schrenk, Instructor.

Financial Modeling in Excel Day 2. Speed vs. Flexibility Tradeoff What we’re making flexible: – Long Term and Short Term Scooter Market Growth – Our Market.

Using Discounted Cash Flow Analysis to Make Investment Decisions Project Analysis By : Else Fernanda, SE.Ak., M.Sc. ICFI.

Chapter 9 Principles of Corporate Finance Eighth Edition Capital Budgeting and Risk Slides by Matthew Will, adopted by Craig Mayberry Copyright © 2006.

Unless otherwise noted, the content of this course material is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 License.

Risk Analysis, Real Options, and Capital Budgeting

Key Concepts and Skills

Risk Analysis, Real Options, and Capital Budgeting

CHAPTER 14 Real Options.

Fundamentals of Corporate Finance

Chapter 23 Real Options Principles of Corporate Finance Ninth Edition

The McGraw-Hill Companies, Inc., 2000

Corporate Financial Strategy Lecture 4: Current Practice in Capital Budgeting and Real Options Module Leader: Professor Jon Tucker Selected slides by McGraw.

Example Exercise 5 Cash Flows from Investing Activities

Risk Analysis and Real Option

Presentation transcript:

Project Analysis Slides by Matthew Will

Electric Scooter – NPV

Electric Scooter - Assumptions

Electric Scooter - Scenarios

Break Even Analysis Point at which NPV = 0 is the break-even point Otobai Motors has a break-even point of 85,000 units sold PV Inflows 400 200 19.6 Break even NPV=0 PV (¥ billions) PV Outflows 85 200 Sales, 000’s

Electric Scooter – Accounting Profit

Break Even Analysis Accounting break-even is different, yet wrong. It does not consider the time value of money. Otobai Motors has an accounting break-even point of 60,000 units sold. 60 40 20 Revenues Break-even profit =0 Accounting revenue and costs (¥ billions) Costs 60 200 Sales, 000’s

Operating Leverage Operating leverage - The degree to which costs are fixed Degree of operating leverage (DOL) - Percentage change in profits given a 1 percent change in sales 16

Operating Leverage Example Use the data from the Otobai scooter project. What is the DOL? 18

Monte Carlo Simulation Modeling Process Step 1: Modeling the project Step 2: Specifying probabilities Step 3: Simulate the cash flows Step 4: Calculate present value

Monte Carlo Simulation

Flexibility & Real Options Decision trees - Diagram of sequential decisions and possible outcomes Decision trees help companies determine their Options by showing the various choices and outcomes The option to avoid a loss or produce extra profit has value The ability to create an option thus has value that can be bought or sold 19

Decision Trees Example - FedEx Expansion Option Exercise delivery option High demand Observe growth in demand for airfreight Acquire option on future delivery Low demand Don’t take delivery

Real Options Option to expand Option to abandon Production options Timing options 19

Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 .25 $300 (.80) - $18 .44 .50 - $130 Invest Yes / No .56 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130

Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 560 .25 $300 (.80) - $18 .44 .50 - $130 240 Invest Yes / No .56 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130 80

Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 560 .25 $300 (.80) (700 × .80) + (0 × .20) = 560 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130 80

Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25 NPV (upside) = −130+ 560 1.096 3 =295 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130 80

Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 NPV = $52 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130 80 NPV = -$69 (Do not invest, so NPV = 0)

Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25 =$83 560 .25 NPV = $83 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 NPV = $52 $0 .25 $100 (.80) $0 (.20) NPV = ? - $130 80 NPV = -$69 (Do not invest, so NPV = 0)

Decision Trees NPV = $19 $700 (.80) $0 (.20) NPV = $295 - $130 560 .25 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 NPV = $52 $0 .25 $100 (.80) $0 (.20) NPV = $19 - $130 80 NPV = -$69 (Do not invest, so NPV = 0) NPV = -18 + (.44 × 83) + (.56 × 0) = $19

Decision Trees NPV = $19 $700 (.80) $0 (.20) NPV = $295 - $130 560 .25 $300 (.80) $0 (.20) - $18 .44 .50 - $130 240 Invest Yes / No .56 NPV = $52 $0 .25 $100 (.80) $0 (.20) NPV = $19 - $130 80 NPV = -$69 (Do not invest, so NPV = 0)