Suppose there is a Russian MNC proposing a 5-year offshore project in Ecuador. There is a constant probability of country risk/political risk in Ecuador per annum. How many scenarios are there during the life of the project when the capital budgeting process is being conducted?
Added by Patrick K.
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The project is proposed to last for 5 years. Show more…
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C. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. (Hint: Use Scenario Manager. Go to the Data menu, choose What-If Analysis, then choose Scenario Manager. After you create the scenarios, you can pick a scenario and type in the resulting NPV (but be sure to return the scenario to the base case afterward). Or you can create a Scenario Summary and use a cell Deviation Times Probability Sales Variable Unit Price per Costs per Probability Sales Unit Unit Scenario NPV Best Case Base Case Worst Case 25% 50% 25% 1,200 1,000 800 28.80 24.00 19.20 $14.40 18.00 $17.28 Expected NPV Standard Deviation: = Coefficient of Variation = Std Dev / Expected NPV = d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV. CV range of firm's average-risk project: 8% YACC = 10% 13% 0.8 to 1.2 Risk-adjusted WACC Risk-adjusted NPV = IRR = Payback =
Akash M.
A five-year fixed-rate loan of $100 million carries a 7 percent annual interest rate. The borrower is rated BB. Based on hypothetical historical data, the probability distribution given below has been determined for various ratings upgrades, downgrades, status quo, and default possibilities over the next year. Information is also presented reflecting the forward rates of the current Treasury yield curve and the annual credit spreads of the various maturities of BBB bonds over Treasuries. a. What is the present value of the loan at the end of the one-year risk horizon for the case where the borrower has been upgraded from BB to BBB? b. What is the mean (expected) value of the loan at the end of year 1? c. What is the volatility of the loan value at the end of year 1? d. Calculate the 5 percent and 1 percent VARs for this loan assuming a normal distribution of values. e. Estimate the approximate 5 percent and 1 percent VARs using the actual distribution of loan values and probabilities. f. How do the capital requirements of the 1 percent VARs calculated in parts (d) and (e) above compare with the capital requirements of the BIS and Federal Reserve System?
Penny R.
A project starts with an initial capital outflow of RM450,000 in exchange for the following likely cash flows: State of Economy Probability End of Year 1 (RM) End of Year 2 (RM) Recession 18% 150,000 250,000 Normal 60% 350,000 450,000 Boom 22% 550,000 100,000 Assume that the economy will be in the same condition in the second year as it was in the first. The discount rate of return is 15 percent. There is no taxation or inflation. Calculate the expected Net Present Value (NPV). (6 marks) Calculate the standard deviation of Net Present Value (NPV). (14 marks) Project X has an anticipated return of RM1,500 and a standard deviation of RM500. Project Y has an expected return of RM1,000 and a standard deviation of RM400. Justify which project is the riskiest.
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