more on project analysis

Question 1

Why might we choose to discount using real or nominal

Answer 1

• doesnt matter

Question 2

• what happens if competing projects last different lengths of time

Answer 2

• Calculate NPV to infinity
• PV=PMT/r(1+r)
• work out the rate for the years
  e. g. 3years, (1+0.1)^3 -1
  e. g. 4years (1+0.1)^4-1

Question 3

multiple internal rates of return

Answer 3

• do project when its at a certain rate of return, and dont do if its at another?

Question 4

Fixed costs and variable costs

Answer 4

• Idea that go up with the amount of use = variable

- fixed costs = stay constant

Question 5

sensitivty analysis

Answer 5

• change one input at a time to see how sensitive the output is to the variable
• have n variables, need to do 2n+1 calculations

Question 6

scenario analysis

Answer 6

• change several variables together, but in ways that make sense
• > e.g. creating scenarios

Question 7

simulation analysis

Answer 7

• get the computer to change inputs in random / pseudo random combinations
• look at shape of distribution of output

Question 8

NPV break-even analysis

Answer 8

• How much can you push each variable until decision changes
  e. g. 1mil project, runs forever and depreciates 10year straight
• step 1: depreciation tax shield
• > 30%*1/10y = 30k per year
• step 2: annuity
• > PV=PMT/r(1+1/(1+r)^n)
• step 3; perpetuity of EBIT
• > 0.7*EBIT/0.1
• solve for 0
• > -1m + 184337.01 + 0.7*EBIT/0.1 =0

Question 9

Real options

Answer 9

• A right to choose to do something later based on information not yet available
• Generally pay a premium
• expand
• get smaller
• to buy an asset
• to sell an asset