1.Conceptually, what is the difference between the methods used to estimate the expected future profits and the expected future cash flows of a

1.Conceptually, what is the difference between the methods used to estimate the expected future profits and the expected future cash flows of a potential investment opportunity?

2.Why is the reinvestment assumption associated with the NPV calculation more appropriate than the reinvestment assumption associated with the IRR calculation?

Hypothetically, you work for a firm that owns and operates five car dealerships.  The chief investment officer suggests that the firm should buy gold as an investment because he read in the paper that the demand for gold is expected to go up significantly in the future.  Would you expect this to be a value enhancing investment? 

4. If the expected IRR of a potential investment opportunity is greater than the firm's WACC, then we know that this is a value enhancing investment opportunity.  Agree or disagree, and why?

5. When estimating the adjusted NPV (or APV) of a project, an analyst needs to estimate the asset's beta to determine the project's risk adjusted discount rate (RADR or Ka).  Should the analyst gather the necessary inputs (equity beta, debt beta, tax rate, etc.) from the firm considering the investment or from a set of pure play firms?  Explain.

6.As a financial analyst of a small manufacturing firm you must consider how to adjust your NPV analysis for the investment to expand the firm's production facility in eastern Washington given the news that state regulators are considering new regulation that would make it considerable more costly to operate this facility in eastern Washington look like.  What would brief memo to the CFO on how you would adjust your NPV analysis be as specific as possible (include a discussion of risk adjusted discount rates and the appropriate risk assessment tool to be used). 

7 .Your firm is considering investing $40 million to develop some new technology to enhance the sales of your existing products. The expected NPV from this investment equals $1.7 million and it was reported that the breakeven level of investment dollars into the development of this new technology is $42 million.  Based on these results from this breakeven analysis, would you recommend the firm invest the $40 million to develop the new technology?

8.You work for a firm in their capital budgeting division and your manager has asked you about the benefits of applying Monte Carlos Simulation when analyzing the firm's alternative investment opportunities.  How would you respond?

9. give a recommendation regarding the decision to invest or not invest in this potential investment opportunity given the following results from Monte Carlo Simulation model:

            Mean NPV              Standard Deviation              Prob(NPV>0)          Value at Risk (VAR)

              $18 m                           $ 38 m                                68%                            -$28 m

10. The Adjusted Net Present Value (APV) model is better to evaluate a potential investment opportunity facing the firm than the traditional NPV model (discounting at WACC) because the APV model considers the valuation effects of financing the project with debt.  Agree or disagree?  Explain why.

11.  If a firm decides to permanently increase its debt to asset ratio (leveraging up):

a.  What would be the impact on the firm's WACC? Explain!

b.  What would be the impact on the firm's asset beta? Explain!

c.   Assuming the firm uses their WACC as the required return, what would be the impact on the NPV of the firm's potential investment opportunities?  Explain!