1. Project Analysis
Slides by Matthew Will

2. Electric Scooter – NPV

3. Electric Scooter - Assumptions

4. Electric Scooter - Scenarios

5. Break Even Analysis Point at which NPV = 0 is the break-even point
Otobai Motors has a break-even point of 85,000 units sold
PV Inflows
400
200
19.6
Break even
NPV=0
PV (¥ billions)
PV Outflows
Sales, 000’s

6. Electric Scooter – Accounting Profit

7. Break Even Analysis
Accounting break-even is different, yet wrong. It does not consider the time value of money.
Otobai Motors has an accounting break-even point of 60,000 units sold. 60 40 20
Revenues
Break-even
profit =0
Accounting revenue and costs (¥ billions)
Costs
Sales, 000’s

8. Operating Leverage
Operating leverage - The degree to which costs are fixed
Degree of operating leverage (DOL) - Percentage change in profits given a 1 percent change in sales 16

9. Operating Leverage Example
Use the data from the Otobai scooter project. What is the DOL? 18

10. Monte Carlo Simulation
Modeling Process
Step 1: Modeling the project
Step 2: Specifying probabilities
Step 3: Simulate the cash flows
Step 4: Calculate present value

11. Monte Carlo Simulation

12. Flexibility & Real Options
Decision trees - Diagram of sequential decisions and possible outcomes
Decision trees help companies determine their Options by showing the various choices and outcomes
The option to avoid a loss or produce extra profit has value
The ability to create an option thus has value that can be bought or sold 19

13. Decision Trees Example - FedEx Expansion Option
Exercise delivery option
High demand
Observe growth in demand for airfreight
Acquire option on future delivery
Low demand
Don’t take delivery

14. Real Options Option to expand Option to abandon Production options
Timing options 19

15. Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 .25 $300 (.80)
- $18
.44
.50
- $130
Invest
Yes / No
.56 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130

16. Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 560 .25 $300 (.80)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130 80

17. Decision Trees NPV = ? $700 (.80) $0 (.20) - $130 560 .25 $300 (.80)
(700 × .80) + (0 × .20) = 560
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130 80

18. Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25
NPV (upside) = − =295
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130 80

19. Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56
NPV = $52 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130 80
NPV = -$69
(Do not invest, so NPV = 0)

20. Decision Trees NPV = ? $700 (.80) $0 (.20) NPV = $295 - $130 560 .25
=$83
560
.25
NPV = $83
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56
NPV = $52 $0
.25
$100 (.80)
$0 (.20)
NPV = ?
- $130 80
NPV = -$69
(Do not invest, so NPV = 0)

21. Decision Trees NPV = $19 $700 (.80) $0 (.20) NPV = $295 - $130 560 .25
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56
NPV = $52 $0
.25
$100 (.80)
$0 (.20)
NPV = $19
- $130 80
NPV = -$69
(Do not invest, so NPV = 0)
NPV = (.44 × 83) + (.56 × 0)
= $19

22. Decision Trees NPV = $19 $700 (.80) $0 (.20) NPV = $295 - $130 560 .25
$300 (.80)
$0 (.20)
- $18
.44
.50
- $130
240
Invest
Yes / No
.56
NPV = $52 $0
.25
$100 (.80)
$0 (.20)
NPV = $19
- $130 80
NPV = -$69
(Do not invest, so NPV = 0)