Log in
Finance
1
answer
0
watching
167
views
18 May 2018

Which of the following options provides the most information about a project’s riskiness?

a) Sensitivity analysis

b) Certainty equivalent method

c) Scenario analysis

d) Risk-adjusted discount rate method

e) Monte Carlo simulation

Watch
1
answer
0
watching
167
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Casey Durgan
Casey DurganLv2
20 May 2018

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Strengths of scenario analysis as compared to sensitivity analysis include which of the following?

a) Scenario analysis allows for the calculation of a project’s coefficient of variation so that the riskiness of projects can be compared to the firm’s average project.

b) Scenario analysis considers the sensitivity of net present value to changes in key variables, the likely range of variable values, and the interactions among variables.

c) Scenario analysis provides all necessary information about both a project’s risk and its profitability in a single step.

d) Answers (a) and (b) are correct.

e) Answers (a), (b), and (c) are correct.

1. In the more complex situation discussed in the Gapenskiarticle about Monte Carlo simulation, in addition to the throughputvariable, the following second uncertain variable wasanalyzed:

a. project horizon

b. discount rate

c. accounts payable

d. salvage value

2. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is IRR?
a. 53.86%

b. 27.98%

c. 17.32%

d. 14.44%

3. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is Payback?

a. 6

b. 3

c. 4

d. 2

A.)

In addition to quantifying the level of risk in capital budgeting, a financial manager needs to assess risk based on "the feel", by implementing the behavioral approach. Between the various risk analyses techniques discussed in the book, if I were CFO, I would choose the appropriate approach, based on the situation, including timing and tax factors.

In break-even analysis, the analyst must conclude the cash inflows amount to quantities large enough to produce a positive NPV. Scenario analysis is used to get a feel for the variable possible outcomes of cash inflows and returns. Determining the NPV based on "worse" scenario, "most likely" scenario and "best" scenario will help establish an NPV range. Simulation analysis utilizes a statistical approach, utilizing probability distributions and random numbers to assess risk. Technological advances has allowed simulation analysis to evaluate thousands of returns in a short period of time, while manipulating a number of variables, which leads to better decisions being made when analyzing risk. The risk-adjusted discount rate (RADR) is used to measure the rate of return that must be reached in order to satisfy the owners and maintain or increase the firm's share price.

The simulation approach seems to render the most statistically accurate and thorough approach, due to the application of probability distribution and vast number of calculations and predictions possible. It seems to also yield the most accurate results possible, due to the number of possible outcomes to be evaluated. The easiest to use would be break-even analysis.

WHAT ARE YOUR THOUGHTS? ELABORATE AND EXPLAIN!

b.) I would favor the risk adjusted discount. The reason I would utilize this method is that it will give me the rate that must be returned for the company to, at minimum, maintain the share price with the the knowledge of what needs to be achieved on the return to improve the firms share price. I believe that this method will also yield me the most accurate information. This is because it will take all factors into consideration. The break even analysis will be the easiest method to implement. The reason I believe this is due to the fact that there is not a lot of research or estimation done since the data is already available to to the company.

WHAT ARE YOUR THOUGHTS? ELABORATE AND EXPLAIN!

Related Documents

FIN 401
Final Exam
Study Guide
FIN 401 : practice questions and solutions
carminelocust386
FIN 401
Final Exam
Study Guide
FIN 401 Study Guide - Monte Carlo Method, Annual Percentage Rate, Effective Interest Rate
carminelocust386
FIN 3104 Lecture Notes - Lecture 2: Interest Rate Risk, Standard Deviation, Risk Aversion
emeraldgerbil649

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in