Chapter XI  Project Analysis & Evaluation
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What is forecasting risk?
The possibility that we will make bad decisions based on the projected cash flow. Bc of the forecasting risk we will think that the project has a positive NPV when it really does not.

What are sources of value?
 1. project cost
 2. unit sales
 3. prices
 4. variable cost
 5. fixed cost

Scenario analysis is?
The determination of what happens to NPV estimates when we ask whatif questions. These are performed to assess the degree of forecasting risk & to identify the most critical components of the success or failure of an investment.

Possible scenarios are:
 a) base case  most likely outcome
 b) best case  high revenues, low cost
 c) worst case  low revenues, high cost

OCF =
 EBIT+DepreciationTaxes
 or
 NI+Depreciation

To calculate Net Income:
 Sales 480,000 
 VC 360,000
 FC 50,000
 Depr. 40,000
 
 EBIT 30,000
 Tax 10,200
 
 NI 19,800

What is sensitivity analysis?
investigation of what happens to NPV when only one variable is changed.

If our NPV estimate turns out to be very sensitive to relatively small changes in the projected value of some component of project cash flow...
...then the forecastin risk associated with that variable is high.

Simulation analysis is?
A combination of scenarion & sensitivity analysis.

Variable cost changes with the?
quantity of output

Formula for VC is?
 VC=Q x v
 or
 total quantity of output x cost per unit of output

Total cost equals to...
VC+FC

Marginal cost
Cost to produce an additional unit of output. Marginal cost is the same as variable cost per unit.

The accounting breakeven point is?
The sales level that results in 0 Net Income. We don't include tax; when our revenues are 0 there is no profit to tax (we do include depreciation).

Values in accounting breakeven formula:
 P  selling price per unit
 v  variable cost /unit
 Q  total units sold
 S  total sales (P x Q)
 VC  total variable cost (v x Q)
 FC  fixed cost
 D  depreciation
 T  tax rate

Accounting break even formula is:
 QactgBE = FC+D / Pv
 Acctg. breakeven occurs when NI is 0 and OCF is equal to D
 * when calculating D, divide investment by the number of years it takes for it to depreciate.

The general breakeven expression:
 Q= FC+OCF / Pv
 where OCF= (SVCFC)

The cash breakeven point formula is:
 QcashBE= FC(+0) / Pv
 A project that breaks even on a cashbasis occurs when OCF is 0 and never pays back.

The financial breakeven point formula:
 QfinBE=FC=OCF / Pv
 it occurs when the NPV of project is 0, discounted payback is equal to project's life.

What is capital rationing?
Exists when we have positive NPV, but can't find necessary financing.

Soft rationing
business units are alocated a certain amount of money each year for capital spending. It is a mean of controlling and keeping track of overall spending.

Hard rationing
occurs when business cna't raise financing for a project under any circumstances.