Week 7 tute: chapter 12 Project valuation

  1. Sensitivity of EBITDA to revenue changes
    • ALso known as pre tax operating cash flow. 
    • EBITDA more sensitive when there are higher fixed costs. 
    • A decrease in sales leads to a higher decrease in cash flow. Increase leads to higher inc in cash flow. 
    • Large decline in ebitda can cause problems because it reduces value of project and impacts the amount of cash a company has to invest in other NPV positive projects.
  2. Sensitivity of EBIT to revenue changes
    • EBIT: accounting profits
    • EBIT is a performance measure that is of interest to investors. 
    • Depreciation and amortisation act like fixed costs.
  3. Cash flow DOL
    • Degree of pre tax cash flow operating leverage 
    • Provides a measure of how sensitive pre tax operating cash flows are to changes in revenue. 
    • In formula sheet
    • Shows: for a 1% change in revenue, by how much % will pre tax operating cash flow (EBITDA) change
  4. Accounting DOL
    • Degree of accounting operating leverage. 
    • A measure of the sensitivity of accounting operating profits (EBIT) to changes in revenue.
    • Tells us that 1% change in revenue will result in % change in EBIT
  5. Breakeven analysis
    AN analysis that tells us how many units must be sold in order for a project to break even on a cash flow or accounting profit basis.
  6. Cross over level of unit sales
    The level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher.
  7. Sensitivity analysis
    • Examination of the sensitivity of the results from a financial analysis to changes in individual assumptions.
    • Not very useful because individual assumptions are related to each other. Values do not tend to change one at a time. 
    • Eg strong/expected/weak economic conditions
  8. Scenario analysis
    • An analytical method concerned with how the results from a financial analysis will change under alternative scenarios.
    • This methodology is highly sensitive to the distributional assumptions made in
    • regard to each input variable.
    • Examines large number of scenarios in a short period of time.
  9. Simulation analysis
    An analytical method that uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis.
  10. Profitability index
    • A measure of the value a project generates for each dollar invested in that project
    • (NPV + initial investment)/ initial investment
    • For every dollar invested, how many dollars it is expected to generate.
  11. Explain and demonstrate how variable costs and fixed costs affect the volatility of pre tax operating cash flows
    Because the FC associated with a project do not change as revenue changes, fluctuations in revenue are magnified so that the EBITDA and EBIT fluctuate more than revenue in percentage terms
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Week 7 tute: chapter 12 Project valuation
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Week 7 tute: chapter 12 Project valuation
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