Chp 11-12

Question 1

7) Four techniques for evaluating cashflows

Answer 1

Payback Period
Internal Rate of Return – multiple solutions, very high IRR with inadequate absolute profit
Net Present Value
Discounted Payback Period

Question 2

9) Definitions of systematic and specific risk

Answer 2

a) Systematic risk – risk arising due to industry/market, that which cannot be diversified away
b) Specific risk – risk arising specific to the circumstances of the company, which can be reduced/eliminated through diversification

Question 3

10) Risk identification process (Acronym –DR RUB)

Answer 3

Desktop analysis – identify additional risks/mitigation options, research past similar projects, experts
Risk analysis at a higher level – identify high risks and decide if project worth analyzing further

Risk register/matrix – cross references to other risk where there is interdependency
Upside as well as downside risks identified
Brainstorming – identify, discuss project risks, place initial evaluation on each risk, mitigation options

Question 4

14) What is included in investment submission (Acronym – FIRM PEN)

Answer 4

Financial results (e.g. ENPV, distribution of NPVs)
Identification of key residual risks
Recommendation
Mitigation strategy (best)

Proposed method of financing the project
Effect on investors
Non-monetary issues – e.g. synergies, political