Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 15 billion. The cost of capital is 10%. The initial investment can be depreciated on a straight-line basis over the 10 -year life of the project. Profits are taxed at a rate of 50%. Consider the following project estimates: These seem to be the important things you need to know, but look out for unidentified variables. Perhaps there are patent problems, or perhaps you will need to invest in service stations that will recharge the scooter batteries. The greatest dangers often lie in these unknown unknowns, or "unk-unks," as scientists call them. Having found no unk-unks (no doubt you'll find them later), you conduct a sensitivity analysis with respect to market size, market share, and so on. To do this, the marketing and production staffs are asked to give optimistic and pessimistic estimates for the underlying variables. Please see table below: 1. What is the NPV of this alternative scheme? (Do not round intermediate calculations, Enter your answer in billions rounded to 1 decimal place.) 2. What is sensitivity analysis? 3. What is the primary usefulness of sensitivity analysis? What is its primary weakness? 4. Perform a sensitivity analysis by computing what happens to NPV if one at a time, we replace the forecasted values of each underlying variable by their optimistic and pessimistic values. 5. What is Business and Equity Valuation? 6. What is Firm Valuation? 7. What is the Adjusted Present Value approach? 8. What are the steps in the Adjusted Present Value approach? Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 15 billion. The cost of capital is 10%. The initial investment can be depreciated on a straight-line basis over the 10 -year life of the project. Profits are taxed at a rate of 50%. Consider the following project estimates: These seem to be the important things you need to know, but look out for unidentified variables. Perhaps there are patent problems, or perhaps you will need to invest in service stations that will recharge the scooter batteries. The greatest dangers often lie in these unknown unknowns, or "unk-unks," as scientists call them. Having found no unk-unks (no doubt you'll find them later), you conduct a sensitivity analysis with respect to market size, market share, and so on. To do this, the marketing and production staffs are asked to give optimistic and pessimistic estimates for the underlying variables. Please see table below: 1. What is the NPV of this alternative scheme? (Do not round intermediate calculations, Enter your answer in billions rounded to 1 decimal place.) 2. What is sensitivity analysis? 3. What is the primary usefulness of sensitivity analysis? What is its primary weakness? 4. Perform a sensitivity analysis by computing what happens to NPV if one at a time, we replace the forecasted values of each underlying variable by their optimistic and pessimistic values. 5. What is Business and Equity Valuation? 6. What is Firm Valuation? 7. What is the Adjusted Present Value approach? 8. What are the steps in the Adjusted Present Value approach
