I need help with Mini -Case in Chapter 13 of Financial Management Principles & Applications 11th edition by titmas, Keown & Martin.

1. Explain how sensitivity analysis and scenario analysis are useful tools for evaluating project risk.

2. What are real options? How does the presence of optionality in the investments that firms make cause the tradionally calculated NPV of a project to be underestimated?

3. Explain how simulation works. What is value of using a simulation approach?

4.How can breakeven analysis be helpful in evaluating project risk?

5. What is sensitivity analysis?

A new project involves the purchase of a new plasma cutting tool that can be used in its metal works division. The products manufactured using the new technology are expected to sell for an average price of $300 per unit, and the company analyst perfomring the analysis expects the firm can sell 20,000 unites per year at the price for a period of 5 years. To get into this business will require the purcase of a $2 million piece of equipment that has a residual or salvage value in 5 years of $200,000. in addition, the firm expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided below:

Inital cost of equipmnt $2,000,000

Project and equipment life 5 years

Salvag value of equipment $200,000

Working capital requirement $300,000

Depreciation expense $360,000

Discount Rate or Required rate of return 12%

Tax Rate 30%

In addition, estimates for unit sales, selling price, variable cost per unit, and fixed cash operating expenses for the base-case, worst-case and best-case are described below:

Expected or Base-Case

Worst