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5. Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a project's risk. In the following table, correctly

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5. Methods of analyzing risk for capital budgeting decisions Several types of analyses are available for evaluating a project's risk. In the following table, correctly identify the analysis being described. Scenario Sensitivity Analysis Analysis Simulation Analysis Requires changes in one assumption at a time to observe the impact on NPV Uses an algorithmic method to pick values randomly from probability distributions to calculate a project's NPV Estimates the NPV after a given period of time, assuming specific changes in the values of multiple key factors that could affect a project's NPV Consider the following case: Coppinger Corp, is evaluating a new project. Coppinger used the expected values of unit sales, price per unit, and variable cost per unit to calculate an expected NPV of $13,500. Coppinger has developed a few different possible cases of what demand and costs might look like for the new project, which are summarized in this table: Unit Sales Price per Unit Variable Cost per Unit NPV Base case 120,000 $6.00 $4.25 $13,500 Worst case 70,000 $5.50 $5.25 -$22,600 Best case 150,000 $6.50 $3.80 $31,200 What kind of risk analysis is Coppinger using? Simulation analysis Sensitivity analysis Scenario analysis. Suppose Coppinger Corp. is evaluating a new capital budgeting project and conducting some basic risk analysis. First, it calculates the project's NPV at various levels for the project's key input variables. Coppinger next calculates the project's NPV at various prices per unit, plots the results on the accompanying graph, and then repeats this process separately for variable cost per unit and required return. This process is a whose results are shown on the graph. NPV (Millions of $1 Price per Unit Required Return Variable Cost per Unit 4 200 120 9 40 9 -40 -120 -200 A -12 12 20 DEVIATION IN According to this analysis, which variable is the key value driver for the project? Required return Price per unit Variable cost per unit At the current input-value estimates, does this project have a positive or negative NPV? 9 40 -40 -120 -200 Capital 2005 Z Required Return Variable Cost per Unit & SM -20 -12 12 20 DEVIATION IN According to this analysis, which variable is the key value driver for the project? Required return Price per unit Variable cost per unit At the current input-value estimates, does this project have a positive or negative NPV? Positive NPV Negative NPV Decision trees are a visual representation of the sequential choices that financial decision makers face when making capital budgeting and investment decisions. In decision tree analysis, the discount rate as you move through the decision tree

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