chapter 10 project analysis, best practice in capital budgeting
23. Monte Carlo simulation Look back at the guano project in Section 6-2. Use the Crystal Ball’
software to simulate how uncertainty about inflation could affect the project’s cash flows.
Waldo County
Waldo County, the well-known real estate developer, worked long hours, and he expected his staff to do the same. So George Chavez was not surprised to receive a call from the boss just as George was about to leave for a long summer’s weekend.
Mr. County’s success had been built on a remarkable instinct for a good site. He would exclaim “Location! Location! Location!” at some point in every planning meeting. Yet finance was not his strong suit. On this occasion he wanted George to go over the figures for a new $90 million outlet mall designed to intercept tourists heading downeast toward Maine. “First thing Monday will do just fine,” he said as he handed George the file. “I’ll be in my house in Bar Harbor if you need me.”
George’s first task was to draw up a summary of the projected revenues and costs. The results are shown in Table 10.8. Note that the mall’s revenues would come from two sources: The com¬pany would charge retailers an annual rent for the space they occupied and in addition it would receive 5% of each store’s gross sales.
Construction of the mall was likely to take three years. The construction costs could be depre¬ciated straight-line over 15 years starting in year 3. As in the case of the company’s other develop¬ments, the mall would be built to the highest specifications and would not need to be rebuilt until year 17. The land was expected to retain its value, but could not be depreciated for tax purposes.
Construction costs, revenues, operating and maintenance costs, and real estate taxes were all likely to rise in line with inflation, which was forecasted at 2% a year. The company’s tax rate was 35% and the cost of capital was 9% in nominal terms.
George decided first to check that the project made financial sense. He then proposed to look at some of the things that might go wrong. His boss certainly had a nose for a good retail project, but he was not infallible. The Salome project had been a disaster because store sales had turned
Year
0 I 2 3 4 5-17
Investment
Land 30
Construction 20 30 10
Operations:
Rentals 12 12 12
Share of retail sales 24 24 24
Operating and maintenance costs 2 4 4 10 10 10
Real estate taxes 2 2 3 4 4 4
TABLE 10.8 Projected revenues and costs in real terms for the Downeast Tourist Mall (figures in $ millions).
out to be 40% below forecast. What if that happened here? George wondered just how far sales could fall short of forecast before the project would be underwater.
Inflation was another source of uncertainty. Some people were talking about a zero long-term inflation rate, but George also wondered what would happen if inflation jumped to, say, 10%.
A third concern was possible construction cost overruns and delays due to required zoning changes and environmental approvals. George had seen cases of 25% construction cost overruns and delays up to 12 months between purchase of the land and the start of construction. He decided that he should examine the effect that this scenario would have on the project’s profitability.
“Hey, this might be fun,” George exclaimed to Mr. Waldo’s secretary, Fifi, who was heading for Old Orchard Beach for the weekend. “I might even try Monte Carlo.”
“Waldo went to Monte Carlo once,” Fifi replied. “Lost a bundle at the roulette table. I wouldn’t remind him. Just show him the bottom line. Will it make money or lose money? That’s the bot¬tom line.”
“OK, no Monte Carlo,” George agreed. But he realized that building a spreadsheet and run¬ning scenarios was not enough. He had to figure out how to summarize and present his results to Mr. County.
QUESTIONS
1. What is the project’s NPV, given the projections in Table 10.8?
2. Conduct a sensitivity and a scenario analysis of the project. What do these analyses reveal about the project’s risks and potential value?
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our Services
Custom Writings Help is a Quality-Oriented Company in Online Writing as a result of hiring exceptional professionals to execute clients' tasks.
Essays
At Custom Writings Help,We understand the struggle of research paper writing, and that is why at Custom WritingS Help, we are all out to help you. We pride ourselves on having a team of clinical writers. The stringent and rigorous vetting process ensures that only the 'BEST' Writers are chosen for the job. We have highly qualified Ph.D. and MA writers working with us; we equally offer these experienced writers specific bonuses and incentives to make them deliver highly original, unique, and informative content at reasonably low prices.
Admissions
Thesis Writing Service
Worlwide, Many Masters Students are struggling with Thesis Completion. A thesis is likely to be the longest and most challenging piece of work a student has ever completed. However, unlike essays and other assignments, a student can pick a particular interest topic and work on their initiative. Fortunately, we are there for you. At Custom Writings Help, you are assured of an authentic, imaginative, informative, linguistically great, and advantageous thesis that adheres to all your needs. So, why continue considering different writers when you have discovered the best in the field?
Editing
Custom Papers
Not a single student can avoid writing custom papers. However, a total lack of experience, skills, and time makes it very hard to produce a superb writing piece. Therefore, if you are seeking professional help, turn to us. Our specialized and experienced writers compose a variety of model papers, including custom essays, college term papers, research papers, book reports, MBA essays, executive summaries, dissertations, Ph.D. theses, admission essays, and research proposals for college and university students at any level.
Coursework
Essay Writing
Most of the students disregard the critical principles of essay writing and compose papers below sensible guidelines. Therefore, with Custom Writings Help, one should not worry about his/her essay. Our Writers compose informative and engaging content on all complexities and topics. We write meaningful and smart essays while prioritizing all aspects that bring about a good grade, such as impeccable grammar, proper structure, zero-plagiarism, and conformance to guidelines.
Coursework
Coourse Work Writing
Don't let the seemingly never-ending onslaught of writing assignments get you down. If you are looking where to get course work assistance online, the writers at Custom Writings Help are here to assist you with all of your writing needs. We undertake to unique delivery of papers that meet the professor's requirements. The content is proofread, edited, and checked plagiarism before submission to customers. No matter how big or small your work is, we will deliver on time. Try US Now! !
Coursework
Dissertation Writing Service
High-Quality Dissertation Writing Services are rare. They require Ph.D. academicians – not easily found. However, are an exception. The years, time, and resources we have invested in the dissertation world has given us a competitive advantage over others. Choose to come to Custom Writings Help; You will find perfect Ph.D. consultants who have written hundreds of dissertations theses ready to help you. Let our dissertation-writing services help you craft your dissertation, for you are assured we will give you the results.