1. 10 Project analysis McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 10-1 the capital investment process
Capital Budget
List of investment projects under consideration by a firm
Do not add fudge factors to cost of capital
Postaudit
Review of project to see if met forecasts

3. 10-2 sensitivity analysis
Types of Analysis
Sensitivity
Analyzes effects of changes in sales, costs, etc., on project
Scenario
Project analysis given particular combination of assumptions
Simulation
Estimates probabilities of different outcomes
Break Even
Level of sales (or other variable) at which project breaks even

4. 10-2 sensitivity analysis
Example
Given expected cash-flow forecasts for Otobai Company’s Motor Scooter project, determine the NPV of project given changes in cash- flow components using 10% cost of capital. Assume constant variables, except the one you are changing.

5. 10-2 sensitivity analysis
Example, continued

6. 10-2 sensitivity analysis
Example, continued

7. 10-2 sensitivity analysis
Example, continued
NPV calculations—Optimistic scenario

8. 10-2 sensitivity analysis
Example, continued

9. Table 10.3 NPV of electric scooter

10. Table 10.3 electric scooter assumptions

11. Table 10.4 electric scooter scenarios

12. Table 10.5 electric scooter accounting profit

13. Table 10.1 electric scooter cash-flow forecasts

14. Figure 10.1 break-even chart
Point at which NPV=0 is break-even point
Otobai Motors has a break-even point of 85,000 units sold
Sales, thousands
PV (Yen)
Billions
400
200
19.6
Break-even
NPV = 0
PV inflows
PV Outflows

15. Figure 10.2 accounting break-even
Accounting break-even does not consider time value of money
Otobai Motors has accounting break-even point of 60,000 units sold
Sales, thousands
Accounting revenue and costs (Yen)
Billions 60 40 20
Break -even
Profit =0
Revenues
Costs

16. 10-2 sensitivity analysis
Operating Leverage
Degree to which costs are fixed
Degree of Operating Leverage (DOL)
Percentage change in profits given 1% change in sales

17. 10-2 sensitivity analysis
Example
Using the data from the Otobai scooter project, calculate the DOL

18. 10-3 monte carlo simulation
Modeling Process
Step 1: Model Project
Step 2: Specify Probabilities
Step 3: Simulate Cash Flows
Step 4: Calculate Present Value

19. Figure 10.3 simulation of cash flows

20. 10-4 real options and decision trees
Diagram of sequential decisions and possible outcomes
Help companies analyze options by showing various choices and outcomes
Option to avoid a loss or produce extra profit has value
Ability to create option has value that can be bought or sold

21. Figure 10.4 fedex’s expansion option

22. Figure 10.4 fedex’s expansion option
Real Options
Option to expand
Option to abandon
Timing option
Flexible production facilities

23. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56

24. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56

25. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56

26. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56
NPV = $295

27. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69
(do not invest, so NPV = 0)

28. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= ?
- $18
- $130
.25
.50
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69
(do not invest, so NPV = 0)
NPV = $83

29. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= $19
- $18
- $130
.25
.50
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69
(do not invest, so NPV = 0)
NPV = $83

30. Figure 10.6 Decision tree $700 (.80) $ 0 (.20) $ 300 (.80) $ 100 (.80)
560
240 80
Invest
Yes / No
NPV= $19
- $18
- $130
.25
.50
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69
(do not invest, so NPV = 0)
NPV = $83