10. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new game is well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market does not like the new game, then the cash flows would be only $5.0 million per year. There is a 50% probability of both good and bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. If the WACC is 9.2%, what is the value (in thousands) of the investment timing option? Do not round intermediate calculations. a. $1,356 b. $1,288 c. $1,492 d. $1,627 e. $1,424

10. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new game is well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market does not like the new game, then the cash flows would be only $5.0 million per year. There is a 50% probability of both good and bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. If the WACC is 9.2%, what is the value (in thousands) of the investment timing option? Do not round intermediate calculations. a. $1,356 b. $1,288 c. $1,492 d. $1,627 e. $1,424

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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| Frontier Corp. is considering a new product that would require an after-tax investment of $1,400,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be good. Tsai Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $108,226.89 b. $137,743.32 c. $167,259.75 d. $196,776.18 e. $216,453.79
An investment project requires an initial payment of $500,000, and then will earn a constant return of $45,000 every year forever. Is this a profitable investment project? Oyes, it is profitable O you can't tell with this information Ono, it is not profitable
A company has a project with initial investment is $40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., R is 29%, and the market return (Le., R is 796?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate () in the NPV analysis equation). 5,555 B) 3,333 C) 4,444 D) 6,666
A project costing $100 will produce perpetual net cash flows that have an annual volatility of 35% with no expected growth. If the project existed, net cash flows today would be $8. The project beta is 0.5, the effective annual risk-free rate is 5%, and the effective annual risk premium on the market is 8%. What is the static NPV of the project? What would you pay to acquire the rights to this project if investment rights lasted only 3 years? What would you pay to acquire perpetual investment rights?
CT Inc. is evaluating a project that would cost P8 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of P6 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only P1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of P10 million at the end of Year 2, and this new investment could be sold for P20 million at the end of Year 3. However, if the project is unsuccessful, the new P10 million investment at the end of Year 2 would only be sold for P5,000,000 at the end of Year 3. Assume a WACC of 12.0%. Listed below are the requirements for this data set: What is the project's expected NPV if the company would not take the growth option? (Round final answer to the nearest peso) What is the project's expected NPV after taking into account this growth option? (Round final answer to the…
martin development company is deciding whether to proceed with Project X. The cost would be $9 million in year 0, there is a 50% chance that X would be hugely successful and would generate a cash after tax flow of $6 million per year during years 1, 2 and three. however there is a 50% chance that X would be less successful and would generate only $1 million per year for the three years. If Project X is hugely successful it would open the door to another investment project why which would require an outlay of 10 million dollars at the end of year 2. project Y would then be sold to another company at a price of $20 million at the end of year 3 Martins weighted average cost of capital is 11%. A)if the company does not consider real options what is Project X expected NPV? b) What is X is expected NPV with the growth option? c)what is the value of the growth option?
Green & Company is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $15.7 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $10.7 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Green's controller has concluded that the operation will most probably result in annual savings of $7.9 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $3.7 million per year for each of years 4 through 7. The company uses a 12 percent discount rate. Use Exhibit A.8. Required: Compute the NPV under the three scenarios. Note: Round PV factor to 3…
Alpha Industries is considering a project with an initial cost of $8.5 million. The project will produce cash inflows of $1.51 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.76 percent and a cost of equity of 11.37 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is the net present value of the project?
4
12. You can purchase a office building for $1.7 million. You expect the cash flow on the building to be $95,000 next year and believe it will grow by 5% each year. You expect to hold the building for 5 years and then sell it for $2 million. What do you expect the yield 10 on the building to be? If your required rate of return is 10%, should you buy the building? If your answer is not the buy the building for $1.7 million, what price would you pay? If your answer is to buy the building, how much more could you pay?
A new computer system will require an initial outlay of $17,500, but it will increase the firm’s cash flows by $3,500 a year for each of the next 8 years. How high can the discount rate be before you would reject the project?
18. Occidental Oman is thinking about a project where the initial investment is RO 12000 and the total life of the project is 5 years. The project is expected to generate RO 3800 every year during the entire life of project. If the management keeps a standard of 3 year as pay back then in this case the decision will be __________. a. The project is not worth as cash flow is not significant b. None of the options c. The project will be rejected because the payback period is more d. The project will be accepted because the payback period is less

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