Question 2. Analytical
Write a short analytical report (3 pages) on how to estimate project risk. In so doing, you define and describe (giving examples):
- Sensitivity analysis
- Simulation Analysis
Discuss the strengths and shortcomings of these methods and the circumstances under which each can be applied. (Make sure I put ILO for quant in here)
Respond to this question in a short paragraph: Who has more information in the job market: the job seeker or the potential employer?
Question 3. – Quantitative Analysis Case
Write a Quantitative Analysis report on the following problems:
- Your firm has an opportunity to make an investment of $50,000. Its cost of capital is 12 percent. It expects after-tax flows (including the tax shield from depreciation) for the next 5 years to follows: The manufacturer of high-quality flatbed scanners is trying to decide what price to set for its product. The costs of production and the demand for product are assumed to be as follows:
Year 1$10,000Year 2$20,000Year 3$30,000Year 4$20,000Year 5$5,000
- Calculate the NPV
- Calculate the IRR (to the nearest percent)
- Would you accept this project.
- Sam Parkington has a nontransferable option to mine for gold on a certain piece of land. He has three choices of actions:
- He can start mining immediately.
- He can conduct further tests to see whether there is a good promise of finding gold.
- He can drop the option.
The cost of the test would be $45,000, and the cost of mining would be $150,000. If he find gold, he expect s to net $600,000.
He estimates the following probabilities. If he starts mining without further tests, he estimates that the probability of finding gold is 55 percent. He expects that the probability of the test being successful is 60 percent. If the test is favorable, the probability is 85 percent that there is gold in the ground, but if the test is not favorable it is only 10 percent. Using a decision tree (that you must show in the paper), make a recommendation.