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Analysis of the Example
To analyze the project the following assignments and questions must be completed and answered by students:
- Construct a pro-forma statement of cash flows through 2029 for the most likely scenario and determine the NPV from both the project and parent perspective for each of the three future exchange rate estimates using the most likely values for each of the variables provided in the exercise. Would you accept the project? Why?
- Apply the proper distributions to your random variables and conduct a Monte Carlo simulation. Forecast the NPV from both the parent and project perspective for each of the three future exchange rate estimates. Would you change your decision to accept/reject the project? Why? What are the most important factors influencing your decision?
Grading Rubric
| Trait(s) | Fails to Meet Expectations | Meets Expectations | Exceeds Expectations |
| Assumptions defined | More than two assumptions are defined incorrectly with appropriate distributions and correlations
| No more than two assumptions are defined incorrectly with appropriate distributions and correlations
| All assumptions are defined correctly with appropriate distributions, correlations, and naming
|
| Forecasts defined | More than one forecast is defined incorrectly or with inappropriate naming
| No more than one forecast is defined incorrectly with appropriate naming
| All forecasts are defined correctly with appropriate naming
|
| Project cash flow estimates | Model determines cash flows in project currency outside of 2% of expected values | Model determines cash flows in project currency within 2% of expected values
| Model exactly determines cash flows in project currency
|
| Exchange rate projections | More than one exchange rate is incorrectly determined
| No more than one exchange rate is incorrectly determined
| All exchange rates are computed correctly |
| Parent cash flow estimates | Model determines cash flows in parent currency outside of 2% of expected values
| Model determines cash flows in parent currency within 2% of expected values
| Model exactly determines cash flows in parent currency
|
| NPV Estimates | NPV from parent and project perspective are computed outside of 2% of expected values
| NPV from parent and project perspective are computed within 2% of expected values
| NPV from parent and project perspective computed exactly
|
| Dynamic model | Model is dynamic with formulas applying values from assumption section with more than two errors
| Model is dynamic with formulas applying values from assumption section with no more than two errors
| Model is dynamic with formulas correctly applying values from assumption section
|
| Simulation run | Simulation fails to run correctly with no errors
| Simulation runs correctly with no errors
| Simulation runs correctly with no errors and efficient run time
|
| Format | Electronic version of spreadsheet does not include only one sheet containing base case scenario set to run simulation. The model is difficult to follow the model and/or all assumptions not clearly labeled or identified
| Electronic version of spreadsheet includes only one sheet containing base case scenario set to run simulation. All assumptions and forecasts clearly labeled and easily identified.
| Electronic version of spreadsheet includes only one sheet containing base case scenario set to run simulation. Model is easy to follow with all assumptions and forecasts clearly labeled and easily identified.
|
| Certainty measures | Forecasts fail to utilize certainty to highlight probability of project capturing value for relevant forecasted variables
| Forecasts utilize certainty to highlight probability of project capturing value for relevant forecasted variables
| Forecasts utilize certainty to highlight probability of project capturing value for all forecasted variables
|
| Forecasting methods explained | Fails to explain the various spot rate forecasting methods
| Explains the various spot rate forecasting methods | Explains the various spot rate forecasting methods and identifies scenarios in which each forecasting method is appropriate
|
| Forecasting method selected | Fails to correctly identify the most appropriate forecasting method
| Correctly identifies the most appropriate forecasting method
| Correctly identifies the most appropriate forecasting method and clearly explains why other forecasting methods are inappropriate
|
| Currency risk | Fails to compare NPV from parent and project perspective and does not describe the impact of currency risk on the project
| Compares NPV from parent and project perspective and correctly describes the impact of currency risk on the project | Compares NPV from parent and project perspective and thoroughly describes the impact of currency risk on the project
|
| Decision based on Monte Carlo results | Provides an incomplete explanation of capital budgeting decision based on Monte Carlo results
| Provides a brief explanation of capital budgeting decision based on Monte Carlo results
| Provides a detailed explanation of capital budgeting decision based on Monte Carlo results
|
| Risk description | Inadequate analysis of forecasts and/or incomplete description of riskiness of capital budgeting project | Analyzes forecasts and provides a brief description of riskiness of capital budgeting project
| Thoroughly analyzes forecasts and provides a complete description of riskiness of capital budgeting project
|
| Range as a measure of risk | Fails to evaluate minimum and maximum values from Monte Carlo simulation to compute range or does not discuss risk
| Evaluates minimum and maximum values from Monte Carlo simulation to compute range and discusses risk
| Evaluates minimum and maximum values from Monte Carlo simulation to compute range and thoroughly discusses risk
|
| Sensitivity analysis | Fails to examine sensitivity analysis and/or inadequate explanation of expected managerial actions | Examines sensitivity analysis along with a brief explanation of expected managerial actions
| Thoroughly examines sensitivity analysis along with a complete explanation of expected managerial actions
|
| Key assumptions | Incomplete information provided on key assumptions in the model | Provides basic information on key assumptions in the model
| Provides complete information on key assumptions in the model
|
| Information integrated | Fails to integrate information from report into body of the answer | Integrates information from report into body of the answer
| Efficiently integrates information from report into body of the answer
|
| Decision | Incorrectly interprets the results to make capital budgeting decision | Correctly interprets the results to make capital budgeting decision. | Thoroughly evaluates the use of NPV in making capital budgeting decisions along with correctly interpreting the results to make capital budgeting decision
|
Name: Date: Grade:
| Trait(s) | Points Possible | None 0% | Fails to Meet Expectations 60% | Meets Expectations 80% | Exceeds Expectations 100% |
| Assumptions defined | 5 | ||||
| Forecasts defined | 5 | ||||
| Project cash flow estimates | 5 | ||||
| Exchange rate projections | 5 | ||||
| Parent cash flow estimates | 5 | ||||
| NPV Estimates | 5 | ||||
| Dynamic model | 5 | ||||
| Simulation run | 5 | ||||
| Format | 5 | ||||
| Certainty measures | 5 | ||||
| Forecasting methods explained | 5 | ||||
| Forecasting method selected | 5 | ||||
| Currency risk | 5 | ||||
| Decision based on Monte Carlo results | 5 | ||||
| Risk description | 5 | ||||
| Range as a measure of risk | 5 | ||||
| Sensitivity analysis | 5 | ||||
| Key assumptions | 5 | ||||
| Information integrated | 5 | ||||
| Decision | 5 |
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