Reference no: EM132172383
Scenario - Midal cables ltd. (Australia) is considering a two-year project to make and sell a single product. It has been estimated that the Special product (ACCATW) TAL conductor will sell for $10 per unit and will have a variable cost of $4 per unit. Directly attributable annual fixed costs would be $150,000 for any volume of annual production.
The marketing department has produced the following estimates of sales each year,
|
Year
|
Unit sold yr.1
|
Unit sold in yr.2
|
Probability
|
|
Year 1
|
50,000
|
|
0.8
|
|
70,000
|
|
0.2
|
|
Year2
|
50,000
|
20,000
|
0.4
|
|
50,000
|
40,000
|
0.6
|
|
70,000
|
50,000
|
0.3
|
|
70,000
|
60,000
|
0.7
|
The initial cost of the investment would be $200,000 at the start of the project.
Ignore taxation and inflation and ignore any working capital investment.
The company has a cost of capital of 10%.
Required:
Calculate the expected net present value of the project.
Calculate by how much would the initial capital expenditure need to exceed the estimate before the expected value of the project became negative.
Calculate by how much would the expected sales volume need to fall short of the estimate before the expected value of the project became negative.
Describe an alternative approach to risk assessment in this example, other than sensitivity analysis. Answer in 100-150 words.
Explain the difference between financial and non-financial (operating) risk. Answer in 100-150 words.
Describe the different ways that could be used for incorporating and measuring risk in a project investment. Answer in 250-300 words.
Describe internal hedging technique.