Assignment 1: Project Risk
Consider the role of simulation analysis and decision trees in capital budgeting risk analysis. Describe the advantages offered by each technique. Describe a scenario that the technique would be appropriate to apply to and explain what you would expect to learn from application of that tool.
Write your response as a one-page memo. Post your memo in the discussion forum and solicit feedback from your classmates. ___________________________________________________________________________________________________________________________ Assignment 1: Budgeting with Real Options
A capital investment project that generates new opportunities is more valuable than one that doesn’t. A flexible project, one that does not commit management to a fixed operating strategy is more valuable than an inflexible one. When a project is flexible or generates new opportunities for the company, it is said to contain real options.
In this assignment, you are to discuss the budgeting implications of different option strategies and the cost-benefit issues associated with such decisions.
Why might recognizing a real option raise but not lower a project’s net present value (NPV) as found in a traditional analysis? Why do we tend to underestimate NPV when we ignore the option to abandon? What do you suggest as a cost-effective approach to capital budgeting analysis when a project contains real options. Write a one-page memo in which you explain the answers to any two of the three questions. Post your memo in the discussion forum and solicit feedback from your classmates. ____________________________________________________________________________
Assignment 2: Applying Capital Budgeting
For your final discussion assignment, respond to the following questions.
Is it realistic to assume that the economic concept of operating at the point where marginal revenue and marginal cost are equal can be applied to real-world strategic planning while at the same time marrying this concept to the capital budgeting process? If so, how can that be done? If the concept is applied, how confident should we be that the firm will achieve the point where marginal cost and marginal revenue are equal?
Your initial response should be two or three paragraphs in length. After you have posted your initial response, read all of your classmates’ responses and comment on at least two other postings.
Write your response as a one-page memo. Post your memo in the discussion forum and solicit feedback from your classmates.