corp_Ch11_09

corp_Ch11_09 - CLASS NOTES WEEK II BMA Ch.11 A project is...

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IRPGEN424 Corporate Finance Alex Kane 1 CLASS NOTES WEEK II BMA Ch.11 A project is not a black box
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IRPGEN424 Corporate Finance Alex Kane 2 Going beyond discounting projected CF Issues include Break-even analysis Sensitivity analysis Monte Carlo simulation (ultimate sensitivity analysis) Value of acquiring more information Analysis of real options involved in the project Waiting (postponement of positive NPV projects) Abandonment of projects Expansion of projects Flexibility (valuable, if expensive, modifications)
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IRPGEN424 Corporate Finance Alex Kane 3 Break Even (BE) analysis: the idea Rather than asking about the potential loss from a given scenario, we can identify the zero NPV scenario -- that which differentiates good from bad outcomes. This is the break even scenario In terms of decision making, it is easier to ask managers: “what is the probability we’ll be above the BE scenario There are two types of BE analyses, “traditional” (based on accounting data) and PV BE
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IRPGEN424 Corporate Finance Alex Kane 4 Typical revenue and cost curves Q (units sold) FC TC = FC +VC R=P*Q (price falls to maintain sales) Π = R–TC BE point Linear Zone R, TC and Π
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Corporate Finance Alex Kane 5 Traditional BE analysis The action is in the (approximately) linear zone The objective is to identify the minimum requirement for a profitable operation The analysis is done for two purposes identify the danger point identify possible improvements by lowering the BE Should the corporation build capacity to maximize profits ??? No!
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corp_Ch11_09 - CLASS NOTES WEEK II BMA Ch.11 A project is...

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