Corporate finance

1. Assume that    you have analyzed a project in Indian Rupees (expected    inflation rate    is 5%)    and arrived at    a net    present    value of Rs 1 billion.If you do    your analysis entirely    in US dollars (expected    inflation rate    is 2%) which of    the following would you    expect    to happen to the numbers in your analysis?
a. Your    growth    rate will be lower and    your cost of capital will be higher
b. Your    growth rate will be higher and    your cost of capital will be lower
c. Your    growth rate will be higher and    your cost of capital will be higher
d. Your    growth    rate will be lower and    your cost of capital will be lower
e. Your    growth    rate and cost of capital will be unchanged.
2. The    NPV of    an investment is the PV    of the    cash flows over    the life of the    investment.Lengthening the life    of a    project,holding    the discount rate constant,will    therefore always increase the NPV.
a. True
b. False
3. You    have computed the NPV of a project to be $25 million,using expected cash flows    and a risk-adjusted discount rate.You are,however,concerned    that you may have made errors on estimating the    cash flows and    the discountn rate.    Which of the following    make you feel more comfortable    with taking the    project, given    this fear?
a. The    project    has a long payback period
b. In your best    case scenario,thenproject has a    NPV of $80 million
c. The    standard deviation in the NPV,when you do a Monte Carlo    simulation yields a high value
d. In your worst case scenario,    the project has    a NPV of $2 million
e. The    project    NPV is    very sensitive    to changes in    your discount rate
4. Most    analysts follow    up a project analysis by asking    what-if    questions, where they assess the impact    of changing    assumptions and    examining the effect on    the bottom line    (NPV,IRR etc).If you decide to do this,    how should you approach    the sensitivity    analysis and how would you use it?
a. Ask    what-if    questions about    every input into the analysis and reject the project,if    any of    the scenarios yields a    bad outcome (negative NPV).
b. Ask    what-if    questions about    key inputs into    the analysis and reject    the project, if    any of    the scenarios yields a    bad    outcome    (negative NPV).
c. Ask    what-if    questions about    every input into the analysis and use it to generate a    range    of values for    the    decision variable (NPV)
d. Ask    what-if    questions about    key inputs into    the analysis and use it    to generate a range of    values    for the    decision    variable(NPV)
e. Ask    what-if    questions about    key inputs into    the analysis and use it    to determine how to manage a project better or    increase its value.
5. In a Monte Carlo simulation,rather than enter expected values for each input,you enter distributions,with parameters,    for each input.    Which of the following    is a benefit of    Monte    Carlo simulations?
a. It forces you to think about    your inputs(and    what may cause them to    change)    more seriously.

b. It allows you to allow for co-movements in your inputs(such    as assuming that your revenue growth will be high when    margins    are high).
c. It yields a    distribution for your output variable(like NPV)    rather    than a    single    number.
d. It    enables    you to see the    range of outcomes on a    project    (best case, worst case    etc.).
e. All    of the    above.
Session
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1. d.Your growth rate will be lower and    your cost of capital will be lower.
Both numbers will be lower by    roughly    3% (the    differential inflation    rate).
2. False. As you lengthen a project’s life, you    have to    increase capital maintenance in    the earlier years. This    will    result    in lower cash flows, which can    more than offset any benefit    from    a longer life(and a higher terminal    value),    at least for some projects.
3. d. In your    worst-case scenario,the    project    has a NPV of $2    million.The fact that your NPV    is positive even in    your worst-case    scenario should    comfort    you,because even in its    worst form, this project still    creates    value    (just    not as    much as    you thought it    would).    All of    the other choices will    make you even    more uncomfortable about    uncertainty.
4. e.    Ask what-if questions about key    inputs    into the analysis and    use it    to determine how to manage a project    better    or increase its    value.It is better to focus on    a few    key inputs and    rather than reject a project    just    because    a few scenarios    yield bad results, you should use the analysis    to help    you determine    that    variables    that you will track on    this project, assuming    that it    passes muster.
5. e.All of the    above

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