Explain how probability analysis could be used to assess the risk of the evaluated projects.
Select all the true statements.

• A. The probabilities can be combined to calculate the expected value of each cash flow element and of the project as a whole
• B. The NPVs of a sample range of possible outcomes and the probability of each NPV can be calculated. If a small sample is taken the distribution of outcomes can be used to calculate the zero activities deviation of the NPVs and the probability of success of the projects.
• C. The company can determine a range of possible outcomes for each of the cash flows in the project, for example, a high, low and medium estimate of each cash flow could be determined.
• D. The net present value (NPV) of the project, if all high, low or medium estimates occurred, can be calculated along with the combined probabilities of their occurrence.

RT produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Market research shows that the maximum demand for products R and T during June 2010 is 500 units and
800 units respectively. This does not include an order that RT has agreed with a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of $100 and $135 per unit respectively. Although the customer will accept part of the order, failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000 financial penalty. At a recent meeting of the purchasing and production managers to discuss the production plans of RT for June, the following resource restrictions for June were identified:
Direct labour hours 7,500 hours
Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours
(Refer to previous 2 questions.)
You have now presented your optimum production plan to the purchasing and production managers of RT.
During your presentation it became clear that the predicted resource restrictions were rather optimistic. In fact, the managers agreed that the availability of all of the resources could be as much as 10% lower than their original predictions.
Assuming that RT completes the order with the commercial customer, and using linear programming, show the optimum production plan for RT for June 2010 on the basis that the availability of all resources is 10% lower than originally predicted.

• A. The optimal plan is to produce 500 units of Product R and 550 units of product T in addition to the contract.
• B. The optimal plan is to produce 550 units of Product R and 650 units of product T in addition to the contract.
• C. The optimal plan is to produce 510 units of Product R and 720 units of product T in addition to the contract.
• D. The optimal plan is to produce 560 units of Product R and 670 units of product T in addition to the contract.
• E. The optimal plan is to produce 520 units of Product R and 620 units of product T in addition to the contract.
• F. The optimal plan is to produce 450 units of Product R and 690 units of product T in addition to the contract.

A company sells and services photocopying machines. Its sales department sells the machines and consumables, including ink and paper, and its service department provides an after sales service to its customers. The after sales service includes planned maintenance of the machine and repairs in the event of a machine breakdown. Service department customers are charged an amount per copy that differs depending on the size of the machine.
The company's existing costing system uses a single overhead rate, based on total sales revenue from copy charges, to charge the cost of the Service Department's support activities to each size of machine. The Service Manager has suggested that the copy charge should more accurately reflect the costs involved. The company's accountant has decided to implement an activity-based costing system and has obtained the following information about the support activities of the service department:

Calculate the annual profit per machine for each of the three sizes of machine using activity-based costing.

• A. Profit Per Machine using ABC: Small $166, Medium $1241, Large $746
• B. Profit Per Machine using ABC: Small $1076, Medium $1041, Large $1946
• C. Profit Per Machine using ABC: Small $376, Medium $2341, Large $986
• D. Profit Per Machine using ABC: Small $176, Medium $1341, Large $946
• E. Profit Per Machine using ABC: Small $196, Medium $1191, Large $1046
• F. Profit Per Machine using ABC: Small $186, Medium $1441, Large $2046

XY can choose from four mutually exclusive projects. The projects will each last for one year and their net cash inflows will be determined by market conditions. The forecast net cash inflows for each of the possible outcomes are shown below.

If the company applies the maximax criterion the project chosen would be:

• A. Project C
• B. Project D
• C. Project B
• D. Project A

A company has to choose between three mutually exclusive projects. Market research has shown that customers could react to the projects in three different ways depending on their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20% chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3. The company uses expected value to make this type of decision.
The net present value of each of the possible outcomes is as follows:

A market research company believes it can provide perfect information about the preferences of customers in this market.
What is the maximum amount that should be paid for the information from the market research company?

• A. $140 000
• B. $145 000
• C. $125 000
• D. $135 000