Question: Refer to the financial risk analysis example presented in Sec

Refer to the financial risk analysis example presented in Sec. 28.4, including its results shown in Fig. 28.15. Think-Big management is quite concerned about the risk profile for the proposal. Two statistics are causing particular concern. One is that there is nearly a 20 percent chance of losing money (a negative NPV). Second, there is more than a 6 percent chance of losing more than half ($10 million) as much as the mean gain ($18 million). Therefore, management is wondering whether it would be more prudent to go ahead with just one of the two projects. Thus, in addition to option 1 (the proposal), option 2 is to take a 16.50 percent share of the hotel project only (so no participation in the shopping center project), and option 3 is to take a 13.11 percent share of the shopping center only (so no participation in the hotel project). Management wants to choose one of the three options. Risk profiles now are needed to evaluate the latter two.
In problem 28.4 & 28.5
(a) Estimate the mean NPV and the probability that the NPV will be greater than 0 for option 2 after performing a simulation with 1,000 trials for this option.
(b) Repeat part a for option 3.
(c) Suppose you were the CEO of the Think-Big Development Co. Use the results in Fig. 28.15 for option 1 along with the corresponding results obtained for the other two options as the basis for a managerial decision on which of the three options to choose. Justify your answer.

View Solution:

Sale on SolutionInn
  • CreatedSeptember 22, 2015
  • Files Included
Post your question