Abstract
Every business decision must start from an in depth analysis of the potential investment opportunities. In order to understand the right choice for project undertaking, all possible choices must be analysed.
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Problems
Problems
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1.
A project has even cash inflows, and requires an upfront investment of 350,000 €. It will generate positive cash flows of 56,000 € per month, for 1 year. The target discount rate is 12 % on a yearly basis. There is no salvage value. Calculate the NPV
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2.
Assume an initial investment on fixed assets of 1,022,000 €. It is expected to generate cash inflows of 271,100 €, 385,000 €, 442,400 € and 266,500 € at the end of first, second, third and fourth year respectively. At the end of the fourth year, the residual value of assets is $90,000. Calculate the NPV
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3.
Given the three possible states of the world in the below table, calculate the expected return and standard deviations
Economy
Probability
Stock A return
Stock B return
Boom
5 %
21 %
25 %
Normal
70 %
2 %
−1 %
Recession
25 %
−15 %
−20 %
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4.
The expansion of a factory has a cost of 16,000,000 €. If the management decides to not do anything, and the economy state is good, the expected revenues are 24,750,000 €. If the economy is bad, revenues will only be 2,000,000 €. If the expansion is approved, the firm will register revenues of 18,500,000 €, and 1,800,000 € if the economy is bad. Assume there is a 53 % probability of a good economy and a 47 % chance of a bad economy. Should the company expand or not?
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5.
Following exercise 4 consider an additional alternative to wait and see how the economy goes, bearing the risk that there will not be enough resources available if waiting. What is the right decision in this case?
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6.
What are the advantages of probabilistic approaches to risk, compared to analytical methods? What about the disadvantages?
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7.
Describe the steps needed in the implementation of simulations for project and business analysis.
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8.
Daniele is offered a choice where you can take a certain amount of 15,000 € or take part in a gamble, where he can win 50,000 € with probability 50 % and 1000 € with probability 50 %. Draw a decision tree to represent the choice.
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Corelli, A. (2016). Business Analysis. In: Analytical Corporate Finance. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-39549-4_4
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DOI: https://doi.org/10.1007/978-3-319-39549-4_4
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