Essay on Net Present Value and Capacity Planning - 1269 Words

CAPACITY PLANNING Real Options Analysis Practice Questions and Solutions CAPACITY PLANNING Question 1: PROJECT SABLE Use a 30% per year discount rate to evaluate Project Sable, which has two phases. You may invest in the first, in both or in neither. You may not invest in the second phase without investing in the first. ï  ± Phase 1 requires an investment of $100. One year later the project delivers on the average $120. ï  ± At that time, after the phase 1 payout has been received, you may invest an additional $100 for phase 2. One year later, phase 2 pays out on the average $140. However, phase 2`s payout can go up or down by 20%. a. How much would Project Sable be worth if it offered only the phase 1 opportunity? b. How much would†¦show more content†¦Phase-1 Year Net-cash-flow PV @ 5% NPV Alternative-1 Year Net-cash-flow PV @ 5% NPV Alternative-2 Year Net-cash-flow PV @ 5% NPV CAPACITY PLANNING 0 -300 -300 -7.48 0 0 45.37 0 1 10 9.52 2 12 10.88 3 15 12.96 4 15 12.34 5 15 11.75 6 15 11.19 7 15 10.66 8 15 10.15 9 10 15 315 9.67 193.38 1 0 2 0 3 -240 -207.32 4 10 8.23 5 12 9.40 6 15 11.19 7 15 10.66 8 15 10.15 9 10 15 315 9.67 193.38 1 2 3 4 5 6 -235 -175.3 7 10 7.11 8 12 8.12 9 10 15 315 9.67 193.38 42.92 Phase1+ Alternative-1 Phase 1+ Alternative-2 -7.48+45.37 -7.48+42.92 A1A2 Question 2: Suppose that discount rate is 5% and volatility is 20%. (c) Do you prefer Alternative 1 or 2 based on real options method? Decide whether the launch of new product is profitable or not based on real options valuation? Alternative-1 Year Revenue Investment CAPACITY PLANNING 0 1 2 3 -240 4 10 5 12 6 15 7 15 8 15 9 15 10 315 Options valuation of Alternative-1: Real Options S = PV(Revenue) X = PV(Investment) A=S/X B = SQRT(T) * sigma 23% of S ïÆ'   =58.12 252.69 207.32 1.22 0.35 Question 2: Suppose that discount rate is 5% and volatility is 20%. (c) Do you prefer Alternative 1 or 2 based on real options method? Decide whether the launch of new product is profitable or not based on real options valuation?Show MoreRelatedThe Drawbacks of Flexible Manufacturing Systems686 Words   |  3 Pagesnew technologies. The investment in terminated capability and capacity may carry out a financial risk in expectation of future product schemes to the firm. The systems’ scalability with a parameter and we set this parameter as the lower bound of capacity that is added to each system. Authors analyse multiple products’ demand for three consecutive periods using stochastic programming approach .The major impact on capacity selection is demand expansion. The model does not allow any inventoryRead MoreTraditional Methods For Evaluating The Capital Investments Essay1020 Words   |  5 Pagesfor your suggested methodology. Net present value in conjunction with internal rate of return are the best methods for evaluating the capital investments of your selected company in the emerging markets to reduce risk. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. A positive net present value indicates that the projected earningsRead MoreRandom718 Words   |  3 Pagesindependence in current board Cash flow issues caused by need to repay loan to shareholder Succession planning Budgeting relating to offering new products Budgeting relating to opening new stores Inventory valuation for financial reporting Various ethical issues relating to operating the current stores Lack of incentive compensation systems ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · ï‚ · Concepts/Tools Examined Net present value CCA analysis Mark to market financial accounting issues Profit analysis Opportunity cost FinancingRead MoreEssay on Net Present Value and Moderate Keywords10098 Words   |  41 PagesChapter 6 | Capacity Planning | | TRUE/FALSE 1. Capacity is the maximum rate of output of a process. Answer: True Reference: Introduction Difficulty: Easy Keywords: capacity, maximum output rate 2. Capacity decisions should be made separate from strategic decisions. Answer: False Reference: Introduction Difficulty: Moderate Keywords: capacity decision, strategic decisions 3. Capacity can be expressed by output or input measuresRead MoreThe Problem Of Amd Is Serious At Many Sites And Can Happen After Mine Closure929 Words   |  4 PagesARD reaction rates. The dumps that increase sediment loads can cause loss of habitat in the surrounding area. Thus, this leads to higher temperatures and increased oxygen ingress through convection. These factors can also be characterized by low pH values (altered chemical equilibria) and elevated content of heavy metals (toxicity to aquatic organisms and human users) and dissolved salts (salinization problems for agriculture and sensitive users). For countries in more humid areas, high levels of precipitationRead MoreA Report On Abc Company1603 Words   |  7 Pagesanalyze the present data and forecast. The internal control is the where the organization’s structure affects, labor and authority flow, the information system of management, and everyone that will assist the organization fulfill its goals or object ive. An adequate internal control system in each company is essential in every functioning company. Internal Control systems would be more efficient and controlled when assigning separate duties, correct transaction authorization, a safety net for importantRead MoreBUS 640 Week 5 Assignment1360 Words   |  6 Pagesadviser for Alba and Gavigan, I recommend a price skimming strategy for pricing merchandise. Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. Penetration pricing requires extensive planning to properly execute a penetration-pricing strategy, the company first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced product (Monger, 2012). Both steps are expensive, so penetration-pricingRead MorePort Authority Analysis1245 Words   |  5 Pagesbalanced scorecard implemented, all managers, including managerial accountants, use the strategy for accurate decision-making to reduce cost and maximize profit. Therefore, developing cost factors, cost accounting, developing a cash budget or using present value in decision-making are critical to the survival of the Aviation Department operations excellence. Indeed, manipulating these factors could move operations performance closer to the efficient frontier. Although airports are increasing running likeRead MoreCase Study : Johnson Controls, Inc. Essay1409 Words   |  6 Pagesinvestment decisions. For instance, the net present value method (NPV) which entails estimating the costs and revenues of a project and discounting these figures to get their present values. Projects with the biggest positive net present value are the ones chosen as they represent the best stream of benefits of investing in the project over and above recovering the cost of initiating the projects. The discount rate is another method which is similar to the net present value method but reflects more on theRead MoreCapacity Planning Using Linear Programming3875 Words   |  16 PagesCompany R’s Strategic Capacity Planning Using Mixed Integer Linear Programming ABSTRACT Company R is experiencing 2.07 more days in producing a certain line of hotdogs. Thus, incurring 51.75% more cost of Php 5, 764. 62 per week. Through work sampling and time study, it was found out that the sealing section of the packaging line is the bottle neck activity with a standard processing time of 2.86 min/kg. Additional machine is needed. Employing strategic capacity planning through formulation