D. Simulation Analysis

Q.1. Which of the following is done using probability distributions?
A. Break-even analysis
B. Sensitivity analysis
C. Scenario analysis
D. Simulation analysis
Q.2. Evaluating the viability of a project by changing a set of variables together at a time is done in:
A. Sensitivity analysis
B. Scenario analysis
C. Break-even analysis
D. Decision tree analysis
Q.3. If risk-adjusted discount rates are used to evaluate investments, that would be the least in the
case of:
A. Investment in new lines

B. Expansion investments
C. Replacement investments
D. Investment in related lines
Q.4. The basic accounting break-even analysis:
A. Ignores the time value of money

B. Is not a linear relationship
C. Takes into consideration variations in unit variable costs
D. Works well even when the product fix varies
Q.5. The investment proposal with the greatest relative risk would have:
A. the highest standard deviation of net present value.
B. the highest coefficient of variation of net present value.
C. the highest expected value of net present value.
D. the lowest opportunity loss likelihood.
Q.6. In Certainty-equivalent approach, adjusted cash flows are discounted at:
A. Accounting Rate of Return

B. Internal Rate of Return
C. Hurdle Rate
D. Risk-free Rate
Q.7. A project costs Rs. 10 million today. Next year (year 1) the cash inflow will be either Rs. 10
million or Rs. 2 million with equal probability. If the year-1 cash inflow was Rs. 10 million, then the
year-2 cash flow will also be Rs. 10 million. If the year-1 cash inflow was Rs. 2 million, then the year-2
cash flow will also be Rs. 2 million. If the firm can abandon the project only after year 1 for a known
amount of Rs. 3 million at that time, what is the abandonment value if the appropriate discount rate
is 5%?
A. Rs. 157,000
B. Rs. 260,000
C. Rs. 521,000
D. Rs. 1,157,000
Q.8. Shinestar, Inc., can invest in one of two mutually exclusive, one-year projects requiring
equal initial outlays. The two proposals have the following discrete probability distributions
of net cash inflows (in Rs.) for the first year:
PROJECT A PROJECT B
PROBABILITY CASH FLOW PROBABILITY CASH FLOW
0.20 2,000 0.10 2,000
0.30 4,000 0.40 4,000
0.30 6,000 0.40 6,000
0.20 8,000 0.10 8,000
1.00 1.00
As an analyst, can you select the better proposal, assuming a risk-averse management?
A. Project A
B. Project B
C. Both are equally good
D. Can’t Say
Q.9. Ustra Ltd. Is considering its new product with the following details:
Initial capital cost Rs. 400 Cr
Annual unit sales Rs. 5 Cr
Selling price per unit Rs. 100
Variable cost per unit Rs. 50
Fixed costs per unit Rs. 50 Cr
Discount rate 6%
What is the NPV of the project (Rs. In Cr)?
A. 188.60
B. 148.60
C. 134.60
D. None of these
Q.10. In the above question, what is the NPV of the project (Rs. In Cr) if the selling price per unit is
reduced to Rs. 97.5 per unit?
A. 101.19
B. 117.89
C. 124.60
D. None of these
Q.11. A firm has an investment proposal, requiring an outlay of Rs. 80,000. The investment proposal
is expected to have two years’ economic life with no salvage value. In year 1, there is a 0.4
probability that cash inflow after tax will be Rs. 50,000 and 0.6 probability that cash inflow after tax
will be Rs. 60,000. The probability assigned to cash inflow after tax for the year 2 is as follows:
Year Cash Flows (Rs.) Probability Cash Flows (Rs.) Probability
1 50,000 0.4 60,000 0.6
24,000 0.2 40,000 0.4
32,000 0.3 50,000 0.5
44,000 0.5 60,000 0.1
The firm uses a 10% discount rate for this type of investment. As per the decision tree approach,
what is the NPV for the proposed investment project (in Rs.) if the worst outcome is realized?
A. -8,118
B. -14,726
C. -10,954
D. None of the above
Q.12. In the above question, what is the NPV of the best outcome (in Rs.) and the probability of that
occurrence?
A. 15,840 and 0.30

B. 29,580 and 0.24
C. 24,100 and 0.06
D. 30,794 and 0.09
ANSWERS
Q.1 Q.2 Q.3 Q.4 Q.5 Q.6 Q.7 Q.8 Q.9 Q.10 Q.11 Q.12
D B C A B D C B C A B C

D. Simulation Analysis

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Q.1. Which of the following is done using probability distributions?

A. Investment in new lines

Q.4. The basic accounting break-even analysis:

A. Ignores the time value of money

A. the highest standard deviation of net present value.

B. the highest coefficient of variation of net present value.

C. the highest expected value of net present value.

D. the lowest opportunity loss likelihood.

Q.6. In Certainty-equivalent approach, adjusted cash flows are discounted at:

A. Accounting Rate of Return

of net cash inflows (in Rs.) for the first year:

PROBABILITY CASH FLOW PROBABILITY CASH FLOW

0.20 2,000 0.10 2,000

0.30 4,000 0.40 4,000

0.30 6,000 0.40 6,000

0.20 8,000 0.10 8,000

C. Both are equally good

Initial capital cost Rs. 400 Cr

Annual unit sales Rs. 5 Cr

Selling price per unit Rs. 100

Variable cost per unit Rs. 50

Fixed costs per unit Rs. 50 Cr

What is the NPV of the project (Rs. In Cr)?

Year Cash Flows (Rs.) Probability Cash Flows (Rs.) Probability

1 50,000 0.4 60,000 0.6

24,000 0.2 40,000 0.4

32,000 0.3 50,000 0.5

44,000 0.5 60,000 0.1

A. 15,840 and 0.30

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