3. Inflation in project analysis Aa Aa It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the value of the cash flows of the project can result in erroneous estimations. Consider the following scenario: Extensive Enterprise Inc. is considering opening a new division to make iGadgets that it expects to sell at a price of $12,450 each in the first year of the project. The company expects the cost of producing each iGadget to be $6,450 in the first year; however, it expects the selling price and cost per iGadget to increase by 1% each year. Based on this information, complete the following table: Selling price in year 4: Cost per unit in year 4: If a company does not take inflation into account when analyzing a project, the expected net present value (NPV) of the project will typically be than the true NPV of the project.

3. Inflation in project analysis Aa Aa It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the value of the cash flows of the project can result in erroneous estimations. Consider the following scenario: Extensive Enterprise Inc. is considering opening a new division to make iGadgets that it expects to sell at a price of $12,450 each in the first year of the project. The company expects the cost of producing each iGadget to be $6,450 in the first year; however, it expects the selling price and cost per iGadget to increase by 1% each year. Based on this information, complete the following table: Selling price in year 4: Cost per unit in year 4: If a company does not take inflation into account when analyzing a project, the expected net present value (NPV) of the project will typically be than the true NPV of the project.

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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Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 Cash flows -$1,325 $450 $460 $470 a. -$182.63 b. -$68.39 c. -$70.45 d. -$288.19 e. -$166.0
Traction Trailers is tentative about projects that have a positive net present value but the returns occur in the later years that are hard to estimate. They have a proposed project costing $325,000 that returns the following cash flows: Year 1 $100,000 Year 2 $200,000 Year 3 $300,000 Year 4 $150,000 Year 5 $150,000 Year 6 $100,000 What is the payback period in years rounded to two decimals?
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Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
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?
5.1.3 Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). INFORMATION Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data: Initial cost Scrap value Depreciation per year Net profit Year 1 Year 2 Year 3 Year 4 Year 5 Net cash flows Year 1 Year 2 Year 3 Year 4 Year 5 Project A R300 000 R40 000 R52 000 R20 000 R30 000 R50 000 R60 000 R10 000 Project B R300 000 0 R60 000 R90 000 R90 000 R90 000 R90 000 R90 000
Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC or cost of capital Net investment cost (depreciable basis) The salvage value of its equipment No other fixed assets will be acquired for following years The company will require an increase in net working capital at the $10,000 beginning The company will liquidate all working capital at the end of the project -10,000 Units sold (constant through years) 60,000 $30.00 $50,000 $17.00 Average price per unit, Year 1 Fixed operating…
Data Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows -$1,100 $450 $480 $500
Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome NPV Recession 0.05 ($34 million) Below average 0.20 (16 million) Average 0.50 12 million Above average 0.20 16 million Boom 0.05 28 million Calculate the project's expected NPV, standard deviation, and coefficient of variation. Enter your answers for the project's expected NPV and standard deviation in millions. For example, an answer of $13,000,000 should be entered as 13. Do not round intermediate calculations. Round your answers to two decimal places. E(NPV): million σNPV: million CV:
A company considering a project with extremely risky cash flows decides to apply a premium to the discount rate used to evaluate the project. The management of the company has set the following limits regarding the use of premia on discount rates: If the CV of the project is less than 1, no premium is added. If the CV of the project is 1 or more, but less than 1.5, the discount rate is multiplied by 1.5 If the CV of the project is 1.5 or more, the discount rate is multiplied by 2. The project under consideration has a CV of 1.5 while the company’s WACC is 10%. What would the discount rate employed to evaluate the project be?
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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