Chapter 10 Richard A. Brealey Stewart C. Myers Slides by Matthew Will McGraw Hill/Irwin
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1 Principles of Corporate Finance Chapter 10 A Project Is Not a Black Box Seventh Edition Richard A. Brealey Stewart C. Myers Slides by Matthew Will
2 - 2 Topics Covered Sensitivity Analysis Break Even Analysis Monte Carlo Simulation Decision Trees
3 - 3 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.
4 - 4 Sensitivity Analysis Example Given 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.
5 - 5 Sensitivity Analysis Example - continued Investment Sales Variable Costs Fixed Costs Depreciation Pretax 50% Profit after tax Operating cash flow Net Cash Flow Year Years NPV= 3.43 billion Yen
6 - 6 Sensitivity Analysis Example - continued Possible Outcomes Range Variable Pessimistic Expected Optimistic Market Size.9 mil 1mil 1.1 mil Market Share Unit price 350, , ,000 Unit Var Cost 360, , ,000 Fixed Cost 4 bil 3 bil 2 bil
7 - 7 Sensitivity Analysis Example - continued NPV Calculations for Optimistic Market Size Scenario Year 0 Years1-10 Investment -15 Sales Variable Costs 33 Fixed Costs 3 Depreciation 1.5 Pretax profit 50% 1.88 Profit after tax 1.88 Operating cash flow 3.38 Net Cash Flow NPV= +5.7 bil yen
8 - 8 Sensitivity Analysis Example - continued NPV Possibilities (Billions Yen) Range Variable Pessimistic Expected Optimistic Market Size Market Share Unit price Unit Var Cost Fixed Cost
9 - 9 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. PV Inflows PV (Yen) Billions Break even NPV=0 PV Outflows Sales, 000 s
10 10 Monte Carlo Simulation Modeling Process Step 1: Modeling the Project Step 2: Specifying Probabilities Step 3: Simulate the Cash Flows Step 4: Calculate Present Value
11 11 Realoptionen Option auf Erweiterungs- oder Nachfolgeinvestition Option, Projekt zu modifizieren Option, Projektbeginn zu verschieben Option auf Projektabbruch
12 12 Decision Trees -550 NPV=? Turboprop -250 NPV=? Piston +150(.6) +30(.4) +100(.6) +50(.4) or (.8) 220(.2) 930(.4) 140(.6) 800(.8) 100(.2) 410(.8) 180(.2) 220(.4) 100(.6)
13 13 Decision Trees Turboprop -550 NPV=96.12 Piston -250 NPV= PV= (.6) (.4) PV= PV= (.6) (.4) PV= *450 or (.8) 220(.2) 930(.4) 140(.6) 800(.8) 100(.2) 410(.8) 180(.2) 220(.4) 100(.6)
14 14 Aufgabe in der Vorlesung -350 NPV=? Turboprop -180 NPV=? Piston PQ12: Neue Flugzeugpreise in t=0; Zinssatz 8%. Welche Maschine kaufen? 960 (.8) +150(.6) 220(.2) 930(.4) +30(.4) 140(.6) +100(.6) or 800(.8) (.2) 410(.8) 0 180(.2) 220(.4) +50(.4) 100(.6)
15 15 Aufgaben zu Hause Q1, 3, 6, 8 (alle ohne Besprechung) PQ2, 10, 13
16 Lösungshilfe Kapitel 10, PQ 13 Continue Hi demand (.8) $960 Hi demand (.6) Lo demand (.2) $150 $220 Quit $500 Continue Hi demand (.4) $930 Lo demand (.4) Lo demand (.6) Turbo -$350 $30 Quit $500 $140 Hi demand (.8) Expand $800 Piston -$180 Hi demand (.6) -$150 Continue Lo demand (.2) $100 Hi demand (.8) $410 $100 Lo demand (.2) Quit $150 $180 Hi demand (.4) Continue $220 Lo demand (.4) Lo demand (.6) $50 $100 Quit $150
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