Please correct answer and don't use hand rating 2. Growth optionsCompanies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the valueof the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options.Consider the case of Markung's Co.:Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annualcash flows for the project under good conditions will be $70,000 and $11,000 under bad conditions. The firm believes that there is a60% chance of good conditions and a 40% chance of bad conditions.If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project isyour answer to the nearest whole dollar.). (Note: Round

To calculate the expected Net Present Value (NPV) of Markung's Co. project, we need to follow these…

Answered: 2. Growth options Companies often come…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 7MC

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2. Growth options Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Consider the case of Sunny Co.: Sunny Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $50,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is . (Note: Round your answer to the nearest whole dollar.) Sunny Co. wants to take a potential growth option into account when calculating the project’s expected NPV. If conditions are good, the firm will…
1. Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project. Be complete and thorough in your answer. 2. Briefly describe the agency relationship that exists between the shareholders and the managers of the firm and how it can result in what is referred to as the agency conflict?
4. Investment timing options Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $42,500. If market demand is strong, General Forge and Foundry Co. thinks that the project will generate cash flows of $28,000 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $2,000 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 14%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the…
Office of Business Administration tells you that Villa Apartment has a project to expand the current operations and the estimated internal rate of return is 12.2%. The Villa Apartment's WACC is 11.8%. Based on all of these, you can safely conclude the: O appropriate discount rate for the project is between 11.8% and 12.2%. O expansion should be undertaken as it has a positive net present value. O project has slightly more risk than the firm's current operations. O project will have a lower debt-equity ratio than the firm's current operations.
4. Investment timing options Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: Tolbotics Inc. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, Tolbotics Inc. thinks that the project will generate cash flows of $29,000 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $2,000 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) -$7,111 O-$6,433 O-$7,788…
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You are the investment manager of an appliance company. The industry is currently in the expansion face and the CEO would like to capture as much of the market share as possible. You asked your analysts to submit project proposals as summarized below. Project Discount Rate Investment Annual Cash Flow Project Life (Years) 10 3M 1M 5 12 4M 1M 8 8 5M 2M 4 8 3M 1.5M 3 12 3M 1M 6 Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented? ABCDE
Man.1
A firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.
Suppose you are considering a project with an initial investment of $500,000. This project has an estimated net present value (NPV) of $750,000. How would you explain the meaning of the $750,000 net present value (NPV) to a nonfinancial manager? O The positive NPV indicates this project is expected to increase the value of the firm by $250,000. The positive NPV indicates this project is expected to increase the value of the firm by $750,000. The project benefits outweigh the costs by $250,000 on a present value basis. O The project benefits outweigh the costs by $500,000 on a present value basis.
If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? (Mote: Do not round Intermediate calculations and round your answer to the nearest whole dollar.) -$7,874 Ⓒ-$6,630 -$8,288 O-$9,531 St. Margaret Beer Co. has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV If St. Margaret Beer Co. delays starting the project? (Note: Do not round Intermediate calculations and round your answer to the nearest whole dollar.) $1,880 Ⓒ$1,410 What is the value of St. Margaret Beer Co's option to delay the start of the project? (Note: Do not round…
Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations. (TABLE IMAGE ATTACHED) 4) If the opportunity cost of capital is 10%, which projects have positive NPVs? 5) If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false? 6)If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down any positive NPV projects?

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