Project Risk Analysis -Sensitivity Analysis

Project Risk Analysis -Sensitivity Analysis. HMG is considering the manufacture of a new chemical compound that is used to make high-pressure plastic containers. An investment of $4 million in plant and equipment is required. The firm estimates that the investment will have a five year life, using straight-line depreciation towaard a zero salvage value. However, the investment has an anticipated salvage equal to 10% of its original cost. The number of pounds of the chemical compound that HMG expects to sell over the five year life of the project are as follows (in millions): 1, 1.5, 3, 3.5, and 2. To operate the new plant, HMG estimates that it will incur additional fixed cash operating expenses of $1 million per year and variable operating expenses equal to 45% of revenues. Furthermore, HMG estimates that it will need to invest 10% of the anticipated increase in revenues each year in net working capital. The price per pound for the new compound is expected to be $2 in Years 1 and 2, then $2.50 per pound in Years 3 through 5. HMG’s tax rate is 38%, and it requires a 15% rate of return on its new product investments.

a. What are the key sources of risk that you see in this project?

b. Use the “goal seek” function within Excel to find the breakeven values for each of the following variables: the initial CAPEX, the working capital percentage of revenue growth, variable cost % of sales, and sale volume

c. Which of the variables analyzed in part b do you think is the greatest source of concern? What, if anything, could you do to reduce the risk of the project?

d. Should you always seek to reduce project risk?

• The Human Observation Project should consist of a minimum of five typed pages. Information should be provided for each section of the Observation Project Form. The project is divided into two section:

  • the gathering of baseline information
  • behavior change

  Be sure that the project submission adheres to the following formatting requirements:

  • Use double-spacing.
  • Use size 12 font.
  • Set margins to one-inch on all sides.
  • Be sure to include your name/course title on the first page.
  • Write in complete sentences, use good English grammar, and correct spelling.
  • Avoid personal pronouns and statements such as “I believe, I placed the coin on the floor…”, “My research proved that….” – in objective, naturalistic research your opinion is not very important, but your findings are. Your research may suggest that…, support the hypothesis…, or indicate….; but it does not necessarily proveanything.
  • Charts and graphs are part of an “A” paper, but are not part of the basic page count of the project. References to outside sources may also part of an A or B level paper. Information should be provided for each section as outlined below.
  • APA documentation style must be used when citing references in context and bibliography (if any).
• 

  Key Terms

  In order to complete the Human Observation Project, you will need to be familiar with the following terms:

  • Statement of the Problem: Explain the problem behavior. Convince the reader it needs to be observed very closely before one could decide how to change the behavior.
  • Theory: This is a prediction. What do you expect to observe. The theory is a general statement. For example, most males or females do not wash their hands after using the restroom. Most people will not pick up after themselves after eating in a public place.
  • Hypothesis: The hypothesis must be written in such a way as to test the theory. A theory is like an umbrella covering behaviors with the presumption that they are related. A good hypothesis rains on the umbrella to see if there are any holes. For example, between the hours of 11:00 and 1:00 on Monday and Wednesday at McDonald’s most patrons (or males, females, adolescents) will not place their napkins, cups, plates, and eating utensils in the trash and return their tray to the rack.
  • Procedure: This is a description of the step-by-step process used during the observation. Where did the observer sit? Was the observer visible to the subject being observed? How was data collected? The description needs to be written in sufficient detail that someone else could attempt to replicate (repeat) the procedure to determine if the same results could be obtained.
  • Results: The results are given in the form of numbers. This is the count. It is often presented in complex statistical terms. A numerical count and percentages will be sufficient for our purposes.
  • Discussion: This is a summary of the results in simpler, more practice language. The numbers are converted to statements of meaning and application.
• 

  Section 1: Naturalistic Observation

  The first half of your research will be a naturalistic observation. You will be determining the baseline of behavior, or what the behavior looks like, or the amount of the behavior present under normal circumstances. The observer is unobtrusive, rather like the wallpaper. There is no interference with the behavior.

  You are to select a human behavior. Discuss the problem surrounding this behavior. The following is a list of topics which have been used in the past. You may select from the list or develop one of your own. Select a behavior which you encounter each day. The greatest challenge is isolating or narrowing the behavior to a single event which you can define, count, and attempt to change or observe as changed in a different environment.

  • Eye contact
  • Hand washing
  • Door opening for others
  • Money on the ground
  • Cleaning off the table after you eat in a fast food restaurant
  • Response time of clerks when the researcher dresses poorly or nicely
  • Tips – restaurant, beauty salon, etc.
  • Helpful behavior when toilet paper is attached to the researchers shoe in a public place
  • Hand waving when driving down a country road
  • Changing television stations in a public waiting room
  • Products purchased from shelves of different height
  • Color of products purchased
  • Seating behaviors in school cafeteria or restaurant
  • Stop light running
  • Use of cell phones in school areas
  • Use of cell phones while driving
  • Purchasing one item or the “full meal deal” at a fast food restaurant
  • Human responses to walking dogs of different sizes or breeds
  • Human response to “Don’t walk on the grass!” signs
  • Driver behavior while waiting on a stop light (make-up, hair combing using rear view mirror)
  • Assistance reaching items from the top shelf
  • Dropping a dollar while walking through Walmart…will someone return the dollar? (Can be an expensive project.)
  • Returning shopping carts to the proper areas
  • Smiling or waving “thank you” when a car stops to allow shoppers to cross in the parking lot
  • Behavior in the check-out line: smiling, conversation…
  • The behavior of children in the check-out line (pulling things from shelves, yelling, smiling, climbing out of cart….)
  • Behavior of children in a classroom (talking, out of seat, interrupting, turning in homework….)

  DO NOT :

  • Place a baby carrier on top of a car and drive around the mall parking lot to see if someone will attempt to stop you
  • Stop your car by the side of the road to see if someone might stop and assist
  • Attempt a tail gating experiment of any kind
  • Select any behavior which might be harmful, socially offensive, or immoral

  Complete the Observation Project Form. Write a theory and hypothesis, explain the procedure you will use to determine if the theory and hypothesis are supported, give the result or the count, and finally, discuss your results or findings.

• 

  Section 2: Experiment

  The second half of the project will be a type of experiment. By introducing a variable, you will attempt to increase or decrease a behavior. For example, one student in Iraq counted the number of men who failed to wash their hands after using the latrine next to the dining facility. This student’s count suggested a problem. During the behavior change section of the project, the student placed honey (the independent variable) on the handles of the doors. As a result, hand washing (the dependent variable) increased.

  Your project will require you to walk through the same steps again, but from the point of view of changing or improving the behavior. Begin with your own results. That is the statement of the problem. You have counted and found that, yes, this is an area of human behavior which should be improved. Complete the Observation Project Form. Again, APA documentation style must be used when citing references in context and references (if any). Your textbook may be your only reference.