Order ID |
53563633773 |
Type |
Essay |
Writer Level |
Masters |
Style |
APA |
Sources/References |
4 |
Perfect Number of Pages to Order |
5-10 Pages |
Description/Paper Instructions
Risk Adjustment in Project Management
Long-Term Financial Management Work 4
This task is about analyzing a real option. You will prepare a report for the CFO and management by answering the questions in this task. The firm has to decide whether to invest $30 Million in a new enterprise system to help manage resources and meet customer demand in the face of considerable technological and market uncertainty. There can be a good or a bad result for this investment. Good Result: A good result has a probability of .5 of occurring. Here the planned cost reductions have been realized and better integration of the supply chain is possible. Annual benefits under this scenario equal $10 million in after-tax cash flow per year over the life of the system which has been estimated as 8 years. Bad Result: The system proves difficult and the growth in market demand for the product is lower. Annual benefits under this scenario are $2 million in after-tax cash flow per year for the 10 years. Real Options: For these capital investments you must analyze the nature of risk in this capital investment and decide on how to adjust for that risk. You have decided to utilize an NPV analysis of the project. Now you must define project risks and utilize the concepts in real options to adjust or plan for that risk. It will be best for you to provide an option tree graphic to show the options and then provide a table with the computations showing how you would compute the value of this project.
Scenario #1: Use 8% cost of capital in computations and compute the good result and poor result NPVs. Calculate the real option NPV using the results computed.
Scenario #2: Use a risk-adjusted cost of capital against the good scenario above which can adjust for risk variables such as experience with the focus of the project, chance of change to estimated variables (revenue, costs, timing, etc.), and/or the potential change in the cost of capital in the future. Compute the new NPV using a variety of risk-adjusted discount rates. Justify your computations in determining how you have adjusted discount rates for risk. Discuss the outcomes from your adjustments and how you would apply them in capital expenditure justification.
Concept Check: Risk in finance is a deviation from expectation. We use this concept in computing beta by mathematically computing the Security Market Line (SML) for assets and then computing the deviation of the individual assets against the market. The utilization of real options analysis in project evaluation is similar to these concepts and the concept of weighted average cost of capital.
Helpful Hint: Risk adjustment in project management can be achieved in several manners. In the case of real options, we first need to identify the different paths our investments can take and then the probability that each event may occur.
Work 5
Task 5
This task has the CFO asking your team to look at how the market value of XYZ is compared to
the industry. You need to come up with a justification for the capital investments being made.
Your team discusses this and has determined EVA (Economic Value Added), as well as MVA
(Market Value Added) concepts, need to be established for the corporation.
Use the following table as a guide:
|
Shares Outstanding |
Stock price |
Market Capitalization |
Debt &Equity 2021 |
WACC |
EBIT |
Net Earnings |
Industry Average |
25,000,000 |
$27.75 |
$ |
$675,000,000 |
13% |
$ 17,975,000.00 |
$ 15,000,000.00 |
Competitor 1 |
20,000,000 |
$36.20 |
$ |
$695,455,000 |
15% |
$ 18,255,000.00 |
$ 15,000,000.00 |
XYZ |
15,000,000 |
$29.15 |
$ |
$321,500,000 |
12* |
$ 10,742,000.00 |
$ 7,045,000.00 |
*12% here is a plug number. This will be different from the number you calculated in Task 3.
Compute the P/E ratio and market capitalization for the Industry Average, Competitor 1, and
BEB.
Compute the MVA and EVA for all 3.
Compare and contrast the ratios; what do the ratios convey to the investing public? How would
you present these internally and externally? Make recommendations to management from
your analysis.
Concept Check: Market value added focuses on the market price and relation to invested
capital while economic value is based on operational profitability compared to invested capital.
These measures help us evaluate our organization internally and externally to help identify gaps
and opportunities.
Helpful Hint: Ratios, by themselves, tell us very little; it is only when they are placed in the
context of the market, industry, or competition that they truly can be powerful.
Work 6
Leasing: You are to use your critical thinking skills, collaboration techniques, creative problemsolving tools, and communication skills in the following scenario: Your company (XYZ) is considering leasing solid oxide fuel cells that produce electricity on-site. You and your team need to perform analysis to support the decision-making process. The lease lasts for 12 years. The lease calls for 13 payments of $15,000 per year with the first payment occurring immediately. The fuel cells would cost $90,350 to buy and would be straight-line depreciated to zero salvage over 12 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 7.5%. The corporate tax rate is 36%.
- What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-12?
- What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
- What is the NPV of the lease relative to the purchase?
- What would the after-tax cash flow in year 12 be if the asset had a residual value of $5,000 (ignoring any possible risk differences)?
- What is your recommendation?
Concept Check: Understanding which cash flows are relevant is key to determining the best financing methods or project acceptance. It helps to detail all your assumptions within the model since questions may arise years after the initial construction of the model.
Helpful Hint: Creating a timeline with corresponding cash flows is usually helpful. You should also do the NPV calculations showing your formula so if anyone wishes to change the variables they will know how to proceed
RUBRIC
QUALITY OF RESPONSE |
NO RESPONSE |
POOR / UNSATISFACTORY |
SATISFACTORY |
GOOD |
EXCELLENT |
Content (worth a maximum of 50% of the total points) |
Zero points: Student failed to submit the final paper. |
20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. |
30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. |
40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. |
50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. |
Use of Sources (worth a maximum of 20% of the total points). |
Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. |
5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. |
10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. |
15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. |
20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. |
Grammar (worth maximum of 20% of total points) |
Zero points: Student failed to submit the final paper. |
5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors |
10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors |
15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. |
20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. |
Structure of the Paper (worth 10% of total points) |
Zero points: Student failed to submit the final paper. |
3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. |
5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper |
7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. |
10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. |
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