a project is not a black box principles of corporate finance sixth edition richard a. brealey...
TRANSCRIPT
A Project Is Not a Black Box
Principles of Corporate Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Lu Yurong
Chapter 10
McGraw Hill/Irwin
10- 2
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Topics Covered
Sensitivity Analysis Break Even Analysis Monte Carlo Simulation Decision Trees
10- 3
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How To Handle Uncertainty
Sensitivity Analysis - Analysis of the effects of changes in sales, costs, etc. on a project.
Scenario Analysis - Project analysis given a particular combination of assumptions.
Simulation Analysis - Estimation of the probabilities of different possible outcomes.
Break Even Analysis - Analysis of the level of sales (or other variable) at which the company breaks even.
10- 4
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Sensitivity Analysis
ExampleGiven the expected cash flow forecasts for Otobai Company’s Motor Scooter project, listed on the next slide, determine the NPV of the project given changes in the cash flow components using a 10% cost of capital. Assume that all variables remain constant, except the one you are changing.
10- 5
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Sensitivity Analysis
315- FlowCashNet
3.0flow cash Operating
1.5after taxProfit
1.550% @ .Taxes
3profitPretax
1.5onDepreciati
3Costs Fixed
30Costs Variable
37.5Sales
15-Investment
10-1 Years0Year
Example - continued
NPV= 3.43 billion Yen
10- 6
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Sensitivity Analysis
Example - continued
Possible Outcomes
bil 2bil 3bil 4Cost Fixed
275,000300,000360,000CostVar Unit
380,000375,000350,000priceUnit
.16.1.04ShareMarket
mil 1.1mil 51mil .9SizeMarket
OptimisticExpectedcPessimistiVariable
Range
10- 7
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Sensitivity Analysis
Example - continuedNPV Calculations for Optimistic Market Size Scenario
NPV= +5.7 bil yen
3.3815- FlowCashNet
3.38flow cash Operating
1.88after taxProfit
1.8850% @ .Taxes
3.75profitPretax
1.5onDepreciati
3Costs Fixed
33Costs Variable
41.25Sales
15-Investment
10-1 Years0Year
10- 8
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Sensitivity Analysis
Example - continued
NPV Possibilities (Billions Yen)
6.53.40.4Cost Fixed
11.13.415.0-CostVar Unit
5.03.44.2-priceUnit
17.33.410.4-ShareMarket
5.73.41.1SizeMarket
OptimisticExpectedcPessimistiVariable
Range
10- 9
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Break Even Analysis
Point at which the NPV=0 is the break even point Otobai Motors has a breakeven point of 85,000 units
sold.
Sales, 000’s
PV (Yen)
Billions
400
200
19.6
85 200
Break even
NPV=0
PV Inflows
PV Outflows
10- 10
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Monte Carlo Simulation
Step 1: Modeling the Project Step 2: Specifying Probabilities Step 3: Simulate the Cash Flows
Modeling Process
10- 11
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
+150(.6)
+30(.4)
+100(.6)
+50(.4)
-550
NPV= ?
-250
NPV= ?
-150
0
or
Turboprop
Piston
10- 12
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
+150(.6)
+30(.4)
+100(.6)
+50(.4)
-550
NPV= ?
-250
NPV= ?
-150
0
or
812
456
660
364
148
Turboprop
Piston
10- 13
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
+150(.6)
+30(.4)
+100(.6)
+50(.4)
-550
NPV= ?
-250
NPV= ?
-150
0
or
812
456
660
364
148 81220.22080.960
Turboprop
Piston
10- 14
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
-550
NPV= ?
-250
NPV= ?
-150
0
or
812
456
660
364
148
+150(.6)
+30(.4)
+100(.6)
+50(.4)
*450
331
45015010.1
660 450150
10.1
660
Turboprop
Piston
10- 15
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
-550
NPV= ?
-250
NPV= ?
-150
0
or
812
456
660
364
148
+150(.6)
+30(.4)
+100(.6)
+50(.4)
NPV=444.55
NPV=888.18
NPV=550.00
NPV=184.55
*450
331
18.88815010.1
812 18.888150
10.1
812
Turboprop
Piston
10- 16
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
812
456
660
364
148
+150(.6)
710.73
+30(.4)
+100(.6)
403.82
+50(.4)
-150
0
*450
331
or
NPV=444.55
NPV=888.18
NPV=550.00
NPV=184.55
-550
NPV= ?
-250
NPV= ?
40.55.44460.18.888 40.55.44460.18.888
Turboprop
Piston
10- 17
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
812
456
660
364
148
+150(.6)
710.73
+30(.4)
+100(.6)
403.82
+50(.4)
-550
NPV=96.12
-250
NPV=117.00
-150
0
*450
331
or
NPV=444.55
NPV=888.18
NPV=550.00
NPV=184.55
12.9655010.1
73.710 12.96550
10.1
73.710
Turboprop
Piston
10- 18
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Decision Trees
960 (.8)
220(.2)
930(.4)
140(.6)
800(.8)
100(.2)
410(.8)
180(.2)
220(.4)
100(.6)
812
456
660
364
148
+150(.6)
710.73
+30(.4)
+100(.6)
403.82
+50(.4)
-550
NPV=96.12
-250
NPV=117.00
-150
0
*450
331
or
NPV=444.55
NPV=888.18
NPV=550.00
NPV=184.55
Turboprop
Piston
10- 19
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Preparation for Next Class
Please read:
BM Chapter 11 , P291-308