1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $945 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $852 million and $493 million (852/ 1.23 493) in 1982. 4.The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year. 5. The annual interest rate is 8%. Interpretation. The opportunity to invest in the Mark II is a three-year call option on an asset worth $493 million with an exercise price of $945 million. How does the value of the option to invest in the Mark II in 1982 change if: a. The investment required for the Mark II is $845 million (vs. $945 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value

1. The decision to invest in the Mark II must be made after three years, in 1985. 2. The Mark II has an investment requirement of $945 million, which is taken as fixed. 3. Forecasted cash inflows of the Mark II have a present value in 1985 of $852 million and $493 million (852/ 1.23 493) in 1982. 4.The future value of the Mark II cash flows is highly uncertain. This value evolves as a stock price does with a standard deviation of 44% per year. 5. The annual interest rate is 8%. Interpretation. The opportunity to invest in the Mark II is a three-year call option on an asset worth $493 million with an exercise price of $945 million. How does the value of the option to invest in the Mark II in 1982 change if: a. The investment required for the Mark II is $845 million (vs. $945 million)? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Option value

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Below are information relating to three (3) possible projects. Evaluate the projects by filling up the blanks provided for the final answers. Show computations in the yellow pad. Net Cash outlay Annual net cash inflows Annual depreciation expense Expected recovery period Cost of capital Discounted payback period Internal rate of return (approximate) Net Present Value (NPV) Simple Accounting Rate of Return Ranking May P300,000 50,000 20,000 10 years 16% June P120,000 35,000 18,000 6 years 18% Dianay P150,000 55,000 25,000 5 years 22%
Quantitative Problem: You own a security with the cash flows shown below. 0 1 2 3 4 0 690 395 230 320 If you require an annual return of 12%, what is the present value of this cash flow stream? Do not round intermediate calculations. Round your answer to the nearest cent.
Take me to the text The following table indicates the net cash flows of a capital asset: Year Net Cash Flow 0 $-13,900 1 $5,500 2 $9,600 Do not enter dollar signs or commas in the input boxes. Use the negative sign where appropriate. Round the factor to 4 decimal places and the NPV to the nearest whole number. Assume the required rate of return is 13%. Determine the net present value of this asset. Year Net Cash Flow 0 1 2 Total $-13,900 $5,500 $9,600 Factor Net Present Value SA $ A
The cash flow diagram below shows the net cash generated (A) every year with initial (1) investment requirement for a certain project whose lifetime is n=8 years with negligible (i.e. zero) salvage value at end of life. It is known that a simple payback period is three (3) years. What is the implied minimum acceptable rate of return (MARR) given this information? A >H I yrs.
Last week, Giant Inc analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s cost of capital from 8% to 10%. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the cost of capital affect the project’s forecasted NPV? Year 0 1 2 3 Cash Flows -$500 $325 $325 $325 -$29.33 b. -$78.93 c. -$337.56 d. -$308.23 e. Cannot be determined Ginger Inc is considering a project that has the following cash flow data. What is the project’s MIRR, if the cost of capital is 14%? Year 0 1 2 3 Cash Flows -$500 $300 -$100 $900 9.22% b. 38.90% c. 29.06% d. 41.08% e. 30.76%
Are there multiple IRRs for the following cash-flow sequence? How many are possible according to Descartes' rule of signs? If ε = 9% per year, what is the ERR for the cash flows of this project? Let MARR = 9% per year. ΕΟΥ 0 1 2 Cash Flow ($) 120 90 50 3 20 4 - 1,810 5 580 6 510 There is (are) multiple IRR(s) for the given cash-flow sequence. A maximum of two IRR value(s) is (are) suggested by the Descartes' rule of signs. The ERR for the cash flows of this project is%. (Round to two decimal places.) 7 410 8 330 9 180 10 110
(Related to Checkpoint 6.6) (Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: Investment Alternatives End of Year 1 2 3 4 5 6 $ 780 A $ 19,000 19,000 19,000 19,000 19,000 B $19,000 19,000 19,000 19,000 19.000 C $19,000 95,000 a. What is the present value of investment A at an annual discount rate of 23 percent? $ 53265.99 (Round to the nearest cent.) b. What is the present value of investment B at an annual discount rate of 23 percent? (Round to the nearest cent.) ..
Q7. Construct a cash flow diagram for the following cash flows: $20,000 outflow at time zero, $4000 per year outflow in years 1 through 3 and $10,000 inflow in years 4 through 8 at an interest rate of 3% per year, and an unknown future amount in year 8.
Lin-ay sang Subay is considering a P600,000 investment in a new equipment that is anticipated to produce the following net cash inflows: Year 1, P125,000; Year P245,000; Year 3, P185,000; Year 4, P105,000 and Year 5, P240,000. If the cash flows occur throughout the year, what is the equipment discounted payback period assuming cost of capital of 9% p.a.?
12. The ABC Company is considering undertaking an investment that promises to have the following cash flows: period 0, −$50; period 1, $90. If the firm waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay −$60 in period 1 and $100 in period 2. Assume a time value of money of 0.05. Which investment should the firm undertake? Use the net present value and the internal rate of return methods.
2. Suppose you expect to receive the following future cash flows at the end of the years indicated: GHC 1800 in year 2, GHC 4200 in year 4, GHC 2,700 in year 5, and GHC 9000 in year 9. If the interest rate is 9% per year, what is the value of the four flows at year 3?
Consider the following two mutually exclusive investments allernatives: Suppose that your firm needs either machine for only two years. The net proceeds from the sale of machine B are estimated to be $200. What should be the required net proceed from the sale of machine A in two years so that both machines could be considered economically indifferent at an interest rate of 10%?(a) $750(b) $780(c) $800(d) $850

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