What is the arithmetic mean for Dave & Buster's if the returns over the past four years are as follows (look below the orange and blue logo for data): IAVE & BUSTER'S YEAR RETURN 2019 6% 2018 13% 2017 6% 2016 7% O 10.2% 9% 11.28% 8% Your portfolio over the past three years are given below. What was your Geometric Return? Remember that if the percentage rate were 5%, in the formula you use the decimal plus 1 as in 1.05. Pick the closest answer. YEAR RETURN 2019 12% 4% 2018 2017 8% 7.73% 7.23% 7.95% 8.13% Sensitivity analysis, scenario analysis, and simulations are all ways to examine variation in estimates for the numbers used in the analysis of risky projects. Which of the following statements is the only one that is CORRECT? Scenario analysis changes only one variable at a time. Simulation uses Monte Carlo estimates over and over several hundred times to form a distribution of possibilities. Scenario analysis permits us to find cases where other projects create diversification for the firm. Sensitivity analysis finds the Best Worst, and Base Case answers by changing all variables. FINALLY a questions withou a calculation needed: Drummond Inc. wants to do some scenario analysis for the purchase of a new grinding tool. Depreciation expense is $18,000 in all three scenarios, and is based on an initial outlay of $90,000 with 5 years of straight line depreciation for the project. There is no added working capital needed. The required return is 9% with a tax rate of 15%. The project has 5 years and there is no salvage value. Sales revenue, costs, and taxes under the scenarios are given below. The NPV for the Worst Case is negative. The NPV for the base case and best case are both positive. From this scenario analysis: we have a range of values for NPV to use to decide if we want to go ahead with the project. we clearly should not go ahead with the project. we should flip a coin to make our decision. we clearly should go ahead with the project. AGAIN: Drummond Inc. wants to do some scenario analysis for the purchase of a new grinding tool. Depreciation expense is $18,000 in all three scenarios, and is based on an initial outlay of $90,000 with 5 years of straight line depreciation for the project. There is no added working capital needed. The required return is 9% with a tax rate of 15%. The project has 5 years and there is no salvage value. Sales revenue, costs, and taxes under the scenarios are given below. BEST Sales 90,000 30,000 18,000 42,000 Costs Depreciation EBIT Tax Expense Net Income OCF = 6,300 35,700 The NPV for the BEST CASE for Drummond is: NOTE: There are five identical cash flows and one negative initial outlay. O 91,219.10 O 118,874.27 O 208,874.27 89,511.88 For the next three questions consider: Drummond Inc. wants to do some scenario analysis for the purchase of a new grinding tool. Depreciation expense is $18,000 in all three scenarios, and is based on an initial outlay of $90,000 with 5 years of straight line depreciation for the project. There is no added working capital needed. The required return is 9%. The tax rate is just 15%. The project has 5 years and there is no salvage value. Sales revenue, costs, and taxes under the scenarios are given below. BEST BASE WORST Sales 90,000 65,000 38,000 Costs 30,000 25,000 18,000 18,000 18,000 Depreciation EBIT 18,000 22,000 42,000 2,000 6,300 300 Tax Expense Net Income 3,300 18,700 35,700 17,000 OCF = The OCF for the BEST CASE for Drummond is: O 53,700 O 35,700 O 19,700 60.000
