a) Outline the sensitivity analysis approach towards investment appraisal, and consider any advantages and also any...
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a) Outline the sensitivity analysis approach towards investment appraisal, and consider any advantages and also any disadvantages. Include a description of a tornado diagram. Compare the sensitivity analysis with a scenario analysis approach, and consider if the latter may be more appropriate. [10 marks] b) The Modern Artefacts Company proposes to invest €5 million in a new manufacturing plant for keepsakes. The plant will depreciate on a straight-line basis. Fixed costs are €2 million per year. A keepsake costs €5 per unit to manufacture and sells for €20 per unit. If the plant lasts for three years and the cost of capital is 12 percent, use the degree of operating leverage formula to estimate the accounting break-even level of annual sales. You should assume there are no taxes. [10 marks] c) An application of real options and decision trees will improve investment analysis in some circumstances. Suggest some examples of when this approach could be beneficial, and briefly describe how a decision tree should be prepared. [10 marks] a) Outline the sensitivity analysis approach towards investment appraisal, and consider any advantages and also any disadvantages. Include a description of a tornado diagram. Compare the sensitivity analysis with a scenario analysis approach, and consider if the latter may be more appropriate. [10 marks] b) The Modern Artefacts Company proposes to invest €5 million in a new manufacturing plant for keepsakes. The plant will depreciate on a straight-line basis. Fixed costs are €2 million per year. A keepsake costs €5 per unit to manufacture and sells for €20 per unit. If the plant lasts for three years and the cost of capital is 12 percent, use the degree of operating leverage formula to estimate the accounting break-even level of annual sales. You should assume there are no taxes. [10 marks] c) An application of real options and decision trees will improve investment analysis in some circumstances. Suggest some examples of when this approach could be beneficial, and briefly describe how a decision tree should be prepared. [10 marks]
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