Financial Risk Modelling Coursework: 2021/22 Academic Session

Topic: Discounted Cash Flow Modelling and Sensitivity and Risk Analysis

This consists of 60% of the overall module mark.

The Problem:

Blue Corn Manufacturing Ltd is in the business of automobile and other ancillary services. The company wants to start its subsidiary business in China as an expansion plan for assembling the auto part. The company’s Chief Operating Officer (COO) after taking into consideration the firm’s portfolio of investments has derived a Weighted Average Cost of Capital (WACC) of 12% as the appropriate discount rate for calculating the firm’s Net Present Value (NPV).

Given the uncertainties surrounding Brexit and the current COVID-19 pandemic, the firm’s COO has asked you, the risk analyst to model the following uncertain inputs, using appropriate probability distribution functions. Following a detailed analysis of the firm’s historical data, you have decided to use the following distributions and parameters to model the uncertain inputs:

Table 1: Uncertain Inputs and Parameters of Distributions

Uncertain Inputs	Distribution	Parameter 1	Parameter 2	Parameter 3
Investment Cost	Triangular	£90,000	£100,000	£150,000
Year 1 Revenue	Triangular	£80,000	£100,000	£110,000
Annual Fixed Cost	Triangular	£32,000	£35,000	£38,000
Annual Revenue Growth Rate	Normal	5%	8%
Annual       Variable       Cost Percentage	Normal	50%	2%

Use the following Sampling Settings:

Sampling Type: Latin Hypercube.

Random Number Generator: Mersenne Twister. Initial Seed: Fixed at 12345.

For the purpose of this coursework, you are required to do the following:

1. Calculate the Discounted Cash Flows (DCF) for 10-years and derive the Net Present Value using the uncertain input variables. (5 Marks)
2. Perform a single simulation of 10,000 iterations for the NPV model and determine the probability of getting a negative (zero) NPV at 95% Confidence Interval (2 Marks)
3. Perform sensitivity analysis for the NPV output to determine the variable with the largest impact on NPV (Biggest Driver of NPV) using the following:

a) Change in Output. (2 Marks)

b) Regression Coefficient. (2 Marks)

c) Correlation Coefficient. (2 Marks)

d) Contribution to Variance. (2 Marks)

Total (15 Marks)

Write a Report to your COO to communicate the findings from your analyses. The report should describe the purpose and result of your analyses. A well written report will demonstrate your ability to:

a) Literature Review: Gather, evaluate and analyse relevant information. Relevant concepts explored, clear and progressive discussion and critical evaluation evidenced. (25-Marks).

b) Findings and Discussion: Make correct conclusions that are supported by the evidence and analyses of the report. Professional and clear presentation of findings. Progressive discussion grounded in appropriate theory. (25-Marks)

c) Recommendations: Cyclical closure evidenced. Discussions are adequate in scope, well underpinned by the project analyses and reflect an understanding of the report`s essence. Strengths & limitations assessed—recommendations made with due consideration of the context. (20-Marks).

d) Presentation: Structure material in a coherent and logical manner supported with relevant diagrams. (10-Marks).

e) Referencing: Follows the Harvard Style. Sources properly referenced and acknowledged within the text. (5-Marks)

(Total Marks 100)

The report should have the following features:

Title page

Terms of reference Summary (Abstract) Table of contents Introduction Methods

Results and Discussions (include the relevant diagrams, graphs or tables that support your results).

Conclusion and Recommendations. References

Note: An electronic copy must be submitted via “Turnitin” on GCU-Learn on or before 5pm Friday January 7th 2022. Failure to submit an electronic copy will automatically constitute a fail. Please refer to the University Guidelines on plagiarism. Calculate the Discounted Cash Flows (DCF) for 10-years and derive the Net Present Value using the uncertain input variables.

Word Count: 1500 (+/- 10%) this should be excluding references.

Any coursework not submitted by the due date will be zero marked unless an approved MITS

is submitted for consideration by the Assessment Board.

Further Guidance on the Coursework

What is a Report: A report is written for a clear purpose and to a specific audience (in this case an uninformed audience). You are advised to use a clearly structured format making use of sections and headings so that the information is easy to locate and the flow is coherent.

The Structure of the Report Title Page: This will include:

• The title;
• Your name;
• The date;

Terms of Reference: Under this heading you could include a brief explanation of who will read the report (audience), and why it was written (purpose). Given that this is an academic piece of work the terms of reference will include:

“A report submitted in fulfilment of the requirements for the module Bank Operational Risk Management (MMN324977), Department of, Finance, Accounting and Risk, Glasgow Caledonian University”. In addition to other elements listed above.

Summary (Abstract): The summary should briefly describe the content of the report. This will cover the following:

• The aims of the report,
• The findings,
• Implications for practice. Amongst others.

Note: The summary should provide the reader with a clear, helpful overview of the content of the report. Calculate the Discounted Cash Flows (DCF) for 10-years and derive the Net Present Value using the uncertain input variables.

Table of Contents: The contents page should list the different headings together with the page numbers. This should be presented in such a way that the reader can quickly scan the list of headings and locate a particular part of the report. You can use whatever numbering system you choose.

Introduction: This should include all the relevant components of an introduction including: The aims and objectives, any necessary background history, amongst others.

Methods: This will include explanations of procedures followed; relevant information on the modelling process, amongst others. Keep in mind that you are writing to an uninformed audience.

Results and Discussion: This section should include a summary of the results of the Discounted Cash Flows modelling together with any necessary diagrams, graphs or tables of data that support your results. This should be presented in a logical order with your discussions. You can also use appendix to show more graphs or tables. Discussion: The main body of the report is where you discuss your material. The facts and evidence you have gathered from your literature review should be analysed and discussed with specific reference to the problem or issue. If this section is lengthy you might divide it into section headings. All sources used should be acknowledged and correctly referenced (using the Harvard referencing style)