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Essay / Research Paper Abstract
A 4 page paper discussing risk associated with a potential new product. Assessing the project risk is difficult in that we cannot know all conditions that will apply by the time the product reaches the market. It does appear that there is less risk than originally believed, however, based on the results of CAPM analysis. Monte Carlo simulation likely will confirm the findings of assessment using CAPM. Other approaches include altering variable values (salvage value, unit sales, revenues, sales price, variable costs) to find the level at which NPV remains positive. CAPM provides an acceptable overarching view. Bibliography lists 2 sources. Accompanying spreadsheet and PowerPoint presentation are available.
Page Count:
4 pages (~225 words per page)
File: CC6_KSfinRisk.rtf
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Unformatted sample text from the term paper:
a follow-up report to an earlier one addressing the production and sale of a new product at Tasty Foods, High Energy-Lite. Projections have been reviewed by several groups and
appear to be sound; the one remaining question is that of project risk. There are several types of risk present in this case.
Those that need to be specifically addressed are those associated with salvage value, unit sales and revenues. Salvage Value Changes Presently, it
is believed that there will be a salvage value of $87,500. This is an area of greatest uncertainty, however. The value of $87,500 is future value, which in
current dollars is the equivalent of $218,190. Years 22% Discount Factor Future Value Present Value 4 2.4936 87,500 218,190
Assuming the worst case and finding at the end of the period that there is no salvage value changes the expected NPV for the expected scenario
(the midrange choice) to a negative number: Salvage Value Exp NPV Present Value New NPV 87,500 178,337 218,190 -39,853
Salvage value can be reduced to $71,517 and still avoid a negative expected NPV. Salvage Value Exp NPV Present Value New NPV 71,517 178,337 178,335 3
Whether this is a realistic value for future salvage largely depends on conditions at the
time of salvage. Projected salvage value is $87,500, but when the time arrives to proceed with salvage activities conditions could be quite different. The equipment may be worth
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