Question 6: Real Options
The traditional NPV analysis ignored various profitable options like expansion abilities in case of a profitable project as well as the closing of unprofitable projects, in its analysis and understanding. Such issues can be highlighted by the use of the alternation of the options for any investment project after the acceptance on certain value and improve its NPV as accepted project.
Question 7: Real Options
The expansion option effects the investment and business decision that is why it is of value and consideration. For instance, in any country where markets are liberalized there would be the highest potential for growth. The business first enters a new market or enters an existing market with a new product or project. The factors like growth potential of company, the appropriate market share and the name recognition impact the difficulty for new competitors to market entry.
Question 8: Explain Sensitivity and Break-Even Analysis.
Sensitivity analysis determines the changes of the financial breakeven point with the changes in the certain factors. These factors include the fixed and variable costs, revenues and many others. The breakeven point is understood as the point where the total sales of the business cover the total cost of the business to create the sales. There is no profit at this point and no losses. Hence at the break-even point the minimum possible amount of the quantity is sold that covers the cost of the business and earns zero profit. After breakeven point, every unit sold gathers profit while the cost decreases with every unit sold and manufactured. The sensitivity analysis in this regard covers how the break-even point changes with the changes in the underlying assumptions about prices and costs.
Question 9: Decision to Wait or not.
There are two sources that concern the decision to wait or not when it comes to value of the investment. The timber price will be increased as well as the timber amount while controlling the forest fire. The option to wait is determined in case of the logging company value and its competitors in the industry that have certain same models to business and estimation for future growth and expansion. Such factors depend on the growth of the forest and its age.
Question 10: Project Analysis
When the negative NPV value occurs in the additional analysis, then it can be said that the additional analysis has benefits which outweighing its costs. There are many advantages of additional analysis that reduced the occurrence and probability of bad decision and their re occurrence. The additional analysis is difficult because the decision making is done based on the past experiences but it is not impossible and helps take the right investments.