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Essay / Research Paper Abstract
This 12 page paper examines two case studies provided by the student and assesses investment opportunities. The first case considers two mining investment opportunities and performs a risk adjusted NPN and a NPV using sensitivity analysis techniques. The second case looks at the way an investor may choose shares, the role that the beta and risk and reward play and compares the results of some shares to the expected results using CAPM. The bibliography cites 3 sources.
Page Count:
12 pages (~225 words per page)
File: TS14_TEinvest2.rtf
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Unformatted sample text from the term paper:
useful, in this case the projects are broadly similar, but the level of risk is not, it is estimated that the level of risk for the underground mining project is
twice that of the strip mining project. The use of the models can be argued as technically correct, however, if we look at the way Syed Ali uses 20% instead
of 10% as the discount rate for the underground mine arguing it is twice as risky. We can argue that this is an interesting argument abut that it has not
been applied correctly. When determining the risk that a project faces there is the need to consider the level of the required reward, this is usually undertaken by adding on
a risk premium (Chadwick, 2000). If the cost of capital is 8% and the strip mining project is assessed at 10%, this equates to a 2% risk premium. However, that
is the cost of capital, if we want to assess the real risk premium for the strip mining, we take the current risk free rate from the 10%, this is
6% so we have a risk premium of 4% (Watts, 1996). If the underground mining is twice as risky then it would make sense that the risk premium will
need to be higher, twice the risk cam be argued as twice the requires return, If this is the case then the formula will start with the risk free rate,
then add to it double the risk premium of the strip mining which was 4%, so the rate of return required will be 6% =8% = 14%. However the method
itself is correct. We can also use a sensitivity analysis, this is also correct, this gives the figures and the variation of the actual results that may be seen as
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