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OTHER THINGS HELD CONSTANT, AN INCREASE IN THE COST OF CAPITAL DISCOUNT RATE WILL RESULT IN A DECREASE IN A PROJECT IRR , T OR F
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FALSE
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BASED ON HISTORICAL DATA, NATUELA GAS RPICES ARE MORE VOLATILE THAN CRUDE OIL PRICES . THIS IS, NATURAL PRICES HAVE A HIGHER STANDARD DEVIATION THAN CRUDE OIL PRICES. T OR F
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T
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CHESAPEAKE ENERGY CO. USES A REUIRED RETURN OF 12.5 % TO EVALUATE MOST PROJECTS OF AVERAGE RISK. SUPPOSE THE CO. IS OOKING AT A NEW ENERGY PROJECT THAT IS OF LOWER THAN AVERAGE RISK AND THE CEO THINKS THE DISCOUNT RATE SHOULD BE RISK ADJUSTED. WHAT EFFECT WILL THIS HAVE ON THE PROJECTS NPV?
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INCREASE NPV
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AARON MCINTIRE INC. A LARGE ALTERNATIVE ENERGY FIRM OPERATING OUT OF VALDEZ, ALASKA, HAS A NEW ENERGY PROJECT IT IS CONSIDERING, THE PROJECT HAS A COST 275K AND IS EXPECTED TO PROVIDE AFTER TAX ANNUAL CASH FLOWS OF 73, 306 FOR EIGHT YEARS. THE FIRMS ;S MANAGEMENT IS UNCOMFORTABLE WITH IRR REINVESTMENT ASSUMPTION AND PREFERS TO MODIFIED IRR APROACH. U HAVE CALCUALTED A COST OF CAPITAL FOR THE FIRM OF 12 PERCENT. WHHATS THE PROJECT MIRR?
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16
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JEFF PATTERSON HAS A SOLAR PANEL ENERGY SAVINGS PROJECT WHICH HAS THE FOLLOWING CASH FLOWS:Year Cash Flow0 -$245,4541 100,0002 100,0003 150,0004 40,0005 25,000The cost of capital is 10 percent. What is the project's discounted payback period?
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2.64
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WHICH OF THE FOLLOWING STATEMENTS IS CORRECT. THE THREE MOST COMMON DISTRIBUTIONS USED MONTE CARLO SIMULATION ARE
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TRIANGULAR, UNIFORM AND LOGNORMAL
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RISK ANALYSIS IN CAPITAL BUDGETING IS USUALLY BASED ON SUBJECTIVE JUDMENTS
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T
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---------IS DESCRIBE AS FOLLOWS:
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SENSITIVITY ANALYSIS
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SPIDER DIAGRAM
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WHCH OF THE FOLLOWING REASON IS NOT A REASON AS TO WHY SENSITIVITY ANALYSIS IS USEFUL?
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GIVES PROBABILITIES OF VARIOUS POSSIBLE OUTCOMES
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-------- EXAMINES SEVERAL POSSIBLE SITUATIONS, USUALLY WORST CASE, MOST LIKELY CASE AND BEST CASE AN ALSO PROVIDES A RANGE OF POSSIBLE OUTCOMES
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SCENARIO ANALYSIS
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------IS A COMPUTERIZED VERSION OF SCENARIO ANALISIS WHUCI USES CONTINUOS PROBABILITY DISTRIBUTION. USING THIS TECHNIQUE, THE COMPUTER SELECTS VALUES FOR EACH VARIABLE BASED ON GIVEN PROBABILITY DISTRIBUTIONS
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MONTE CARLO SIMUALTION
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THE PROJECT THAT WILLIAMS UNDERTOOK THAT I DESCRIBED IN THE CAPITAL BUDGETING AND RISK ANALYISI IN THE OIL AND GAS INDUSTRY LECTURE IS
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DEVILS TOWER
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PROVEN RESERVES IS THE LOWEST RESEFVES NUMBER AND IS THE AMOUNT THAT THE GEOLOGIST HAVE THE HIGHEST LEVEL OF BEING SURE IS AT LEAST THIS AMOUNT OF OIL IN THE RESERVE FORMATION.
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P90
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5 BASIC RULES OF THUMB IN CHOOSING PROBABILITY DISTRIBUTIONS
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If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data – if appropriate. Does the variable you are modeling only assume discrete values? If so, use discrete distributions. Select distributions that fit the wisdom of experts from whom you get parameter estimates. If there is a theoretical reason for selecting a particular distribution, then certainly do so. Use the KISS principle! (Keep it Simple, Stupid!)
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