Reference no: EM132428264 , Length: word count:-1000

Write a 750 to 1000 word paper, APA.

Include the following:

• Complete questions A through J for the Mini Case involving Shrieves Casting Company on pages 495 & 496. Please complete the paper in actual paper format including an introduction paragraph, a clearly labeled paragraph for each question (A, B, C, etc.), a conclusion paragraph, and a references page.
• Include a title page and 3-5 references. Only one reference may be from the internet (not Wikipedia).

Question a. Define "incremental cash flow."

• 1. Should you subtract interest expense or dividends when calculating project cash flow?
• 2. Suppose the firm spent $100,000 last year to rehabilitate the production line site. Should this be included in the analysis? Explain.
• 3. Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be included in the analysis? If so, how?
• 4. Finally, assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? If so, how?

Question b. Disregard the assumptions in Part a. What is the depreciable basis? What are the annual depreciation expenses?

Question c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows?

Question d. Construct annual incremental operating cash flow statements.

Question e. Estimate the required net working capital for each year and the cash flow due to investments in net working capital.

Question f. Calculate the after-tax salvage cash flow.

Question g. Calculate the net cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project's NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?

Question h. What does the term "risk" mean in the context of capital budgeting; to what extent can risk be quantified; and, when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?

Question i.

• 1. What are the three types of risk that are relevant in capital budgeting?
• 2. How is each of these risk types measured, and how do they relate to one
• another?
• 3. How is each type of risk used in the capital budgeting process?

Question j.

• 1. What is sensitivity analysis?
• 2. Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume each of these variables can vary from its basecase, or expected, value by ±10%, ±20%, and ±30%. Include a sensitivity diagram, and discuss the results.
• 3. What is the primary weakness of sensitivity analysis? What is its primary Question usefulness?

Question k. Assume that Sidney Johnson is confident in her estimates of all the variables that affect the project's cash flows except unit sales and sales price. If product acceptance is poor, unit sales would be only 900 units a year and the unit price would only be $160; a strong consumer response would produce sales of 1,600 units and a unit price of $240. Johnson believes there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).

• 1. What is scenario analysis?
• 2. What is the worst-case NPV? The best-case NPV?
• 3. Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, as well as the NPV's standard deviation and coefficient of variation.

Question l. Are there problems with scenario analysis? Define simulation analysis, and discuss its principal advantages and disadvantages.

Question m.

• 1. Assume the company's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new line be classified as high risk, average risk, or low risk? What type of risk is being measured here?
• 2. Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk. Should the new line be accepted?
• 3. Are there any subjective risk factors that should be considered before the final decision is made?

Question n. What is a real option? What are some types of real options?

Attachment:- real option.rar