Define (a) sensitivity analysis, (b) scenario analysis, and (c) simulation analysis. If GE were considering two projects (one for $500 million to develop a satellite communications system and the other for$30,000 for a new truck), on which would the company be more likely to use a simulation analysis?

Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or down? Explain.

If you were the CFO of a company that had to decide on hundreds of potential projects every year, would you want to use sensitivity analysis and scenario analysis as described in the chapter, or would the amount of arithmetic required take too much time and thus not be cost-effective? What involvement would nonfinancial people such as those in marketing, accounting, and production have in the analysis?

What are some differences in the analysis for a replacement project versus that for a new expansion project?

What is the essential difference between sensitivity analysis and scenario analysis?

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated?

Explain why net operating working capital is included in a capital budgeting analysis and how it is recovered at the end of a project’s life.

Define scenario, sensitivity, and simulation analysis.

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

$$\begin{matrix} \text{Sales revenues} & \text{\$ 15 million}\\ \text{Operating costs (exluding depreciation)} & \text{10.5 million}\\ \text{Depreciation} & \text{3 million}\\ \text{Interest expense} & \text{3 million}\\ \end{matrix}$$

The company has a 40% tax rate, and its WACC is 11%. a. What is the project’s cash flow for the first year (t=1)? b. If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? c. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a?

What is Monte Carlo simulation? What principles underlie its use, and what steps are followed in applying it?

Before a URL is added to listOfPendingURLs, line 25 checks whether it has been traversed. Is it possible that listOfPendingURLs contains duplicate URLs? If so, give an example.

How to create a Scanner object for reading text from a URL?

Define risk in terms of the cash flows from a capital budgeting project. How can determination of the breakeven cash inflow be used to gauge project risk?