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 discount 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,the project 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.

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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