BFIN620_PPT_CH9_sp09-12

BFIN620_PPT_CH9_sp09-12 - 8- 1Project AnalysisProject...

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Unformatted text preview: 8- 1Project AnalysisProject AnalysisChapter 9Brealey-Myers-Marcus5thEditionBusiness Finance 6208- 2Topics CoveredHow firms organize the investment processDealing with “What If” questionsSensitivity AnalysisScenario AnalysisBreak-even analysisOperating leverageManagerial flexibility and options8- 3Capital Budgeting ProcessCapital BudgetThe formal roster of planned investment projectsCapital Budgeting Process1 - Identify and rank all investment projects2 - Authorize projects according to:•Government regulation•Production efficiency•Capacity requirements•Net present value (NPV) or other criteria8- 4Capital Budgeting IssuesIssues to Monitor in Capital BudgetingEnsuring consistent financial forecasts (methodology and assumptions) across a firm’s operating divisionsEliminating conflicts of interestReducing forecast biasAvoiding costs not properly attributable to a projectUsing appropriate investment criteria (NPV)And, perhaps most importantly:Managing often openly hostile competition inside a firm among potentially good investment ideas8- 5Handling Project UncertaintySensitivity AnalysisEvaluating the effects of changes in project parameters (such as cost of capital, frontend investments, fixed and variable costs) on project profitabilityScenario AnalysisEvaluating project performance and profitability under alternative combinations of assumptions.Simulation AnalysisEstimating the probability of alternative possible outcomes for an investment project.Break-Even AnalysisDetermining the level of sales (or some other measure) at which a project (or the entire company) breaks even.8- 6Sensitivity AnalysisExampleThe Finefodder supermarket chain plans to open a new superstore. The figures on the following slide represent the most probable future performance of the store over its expected 12-year life.What is the NPV of the new store project? Assume an 8% cost of capital.The most probable future pattern of performance for an investment project is often called the base case.8- 7Sensitivity Analysis7805,400-FlowCashNet 780FlowCashOperating330TaxesAfter Profit 22040%@.Taxes550fitPretax Pro450onDepreciati2,000CostsFixed13,000CostsVariable16,000Sales5,400-Investment12-1YearsYear NPV Calculation for the Superstore Base CaseNPV = $4788- 8Sensitivity AnalysisThe supermarket chain is concerned that assumptions...
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This note was uploaded on 10/10/2011 for the course BUSINESS 620 taught by Professor Paul during the Spring '11 term at Ohio State.

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BFIN620_PPT_CH9_sp09-12 - 8- 1Project AnalysisProject...

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