Question

Question 1 a) A project requires an initial investment in equipment of €90,000. The project is expected to produce sales revenues of €120,000 for three years. Variable manufacturing costs are estimated to be 60% of the revenues, and annual fixed costs are estimated at €4000. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for €3,000. The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the project. What would the NPV of the project be if the revenues were higher by 10% and the costs were 65% of the revenues? (10 Marks) b) Describe the sensitivity analysis approach towards investment appraisal, and explain its potential advantages. (5 Marks) c) A 'Real Options' approach can in some circumstances improve an investment appraisal. Explain this approach, and suggest some examples of when it could be usefully employed. Continue your discussion with a description of the 'Decision Tree' approach, and its possible applications. (10 Marks)

          Question 1
a) A project requires an initial investment in equipment of €90,000. The project is
expected to produce sales revenues of €120,000 for three years. Variable
manufacturing costs are estimated to be 60% of the revenues, and annual fixed
costs are estimated at €4000. The assets are depreciated using straight-line
depreciation. At the end of the project, the firm can sell the equipment for €3,000.
The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV
of the project. What would the NPV of the project be if the revenues were higher
by 10% and the costs were 65% of the revenues?
(10 Marks)
b) Describe the sensitivity analysis approach towards investment appraisal, and
explain its potential advantages.
(5 Marks)
c) A 'Real Options' approach can in some circumstances improve an investment
appraisal. Explain this approach, and suggest some examples of when it could be
usefully employed. Continue your discussion with a description of the 'Decision
Tree' approach, and its possible applications.
(10 Marks)

Question 1
a) A project requires an initial investment in equipment of €90,000. The project is
expected to produce sales revenues of €120,000 for three years. Variable
manufacturing costs are estimated to be 60% of the revenues, and annual fixed
costs are estimated at €4000. The assets are depreciated using straight-line
depreciation. At the end of the project, the firm can sell the equipment for €3,000.
The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV
of the project. What would the NPV of the project be if the revenues were higher
by 10% and the costs were 65% of the revenues?
(10 Marks)
b) Describe the sensitivity analysis approach towards investment appraisal, and
explain its potential advantages.
(5 Marks)
c) A 'Real Options' approach can in some circumstances improve an investment
appraisal. Explain this approach, and suggest some examples of when it could be
usefully employed. Continue your discussion with a description of the 'Decision
Tree' approach, and its possible applications.
(10 Marks)

Added by Stephanie M.

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