Question: 1. In the preceding chapter we examined the payback period capital-budgeting criterion. Often this capital-budgeting criterion is used as a risk-screening device. Explain the rationale behind its use.
2. Use the concept of real options to explain why large restaurant chains often introduce new concept restaurants that have negative NPVs.
3. Explain how simulation works. What is the value in using a simulation approach?
4. (Relevant cash flows) SCOP TI is considering introducing a variation of its current breakfast tea, Earl Grey 1336. The new tea bags will be similar to the old with the exception that it will contain small caramel-flavored stars and will be called Caramel 1336. It is estimated that the sales for the new tea bags will be €2 million (USD equivalents 2.23 million); however, 10 percent of those sales will be former Earl Grey 1336 customers who have switched to Caramel 1336 but who would not have switched if the new product had not been introduced. How does this impact the decision to introduce Caramel 1336?