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L_15_ - Lecture Outline Lecture 15 Chapter 11 Project...

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Lecture Outline Lecture 15 Chapter 11: Project Analysis and Evaluation Lecture Organization Operating Leverage Additional Considerations in Capital Budgeting
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Capital Budgeting Questions Projected versus Actual Cash Flows
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Capital Budgeting Questions Forecasting Risk Forecasting risk In order to develop reliable cash flow estimates for the projects we have to understand (among other things)
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Quantity Analysis How sensitive the cash flows to changes in quantity?
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OPERATING LEVERAGE Operating leverage Operating leverage
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Example of Different DOL projects Example: comparison two alternative cost structures for project A and B; Project A: FC (Proj. A) =$10,000; VC (Proj. A) = $6, Unit Price=$10 Project B: FC (Proj. B) =$25,000; VC (Proj. B) =$3, Unit Price=$10 consider what minimum quantity of sales Q* would be required to favor one project over another. Solution
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Example of Different DOL projects $10,000 -$25,000 10,000 $20,000 5,000 Quantity $0 OCF $10,000 2,500
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OPERATING LEVERAGE Implications of Operating Leverage The higher the degree of operating leverage , the In general, the lower the fixed costs
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