8. Company ABC invests in a long-term project that will start generating cashflows 10 years from now (and will then continue generating cash flows forever). Thefirst cash flow is going to be equal to $22 million. Cash flows will then grow 2% peryear forever. If the project costs $460 million today, is it a good investment if interestrates are (and are going to be forever) equal to 5%?

To determine whether a project is a good investment or not, we compute the net present value of the…

Answered: 8. Company ABC invests in a long-term…

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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An investment, which is worth $57,023.00 and has an expected return of 17.00 percent, is expected to pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the present value of the annual cash flow that is expected in 3 years from today? O $9,693.91 (plus or minus 3 dollars) O $35,603.48 (plus or minus 3 dollars) O $6,052.59 (plus or minus 3 dollars) O $8,285.39 (plus or minus 3 dollars) O none of the answers are within 3 dollars of the correct answer
c) Consider this question: XYZ Company can borrow money at an interest rate of 10% (that's their Cost of Capital). They have an opportunity to invest in a project that will generate returns (Free Cash Flows) over the next three years. One year from now, the project will generate $80,000 in FCF, two years from now the project will generate $90,000 in FCF, and three years from now the project will generate $100,000 in FCF. The project will require an investment of $230,000. Is it worth doing? Time 1 year from now 2 years from now 3 years from now Free Cash Flow $ $ Cost of Capital 10% 80,000 90,000 100,000
Suppose you considering investing $34 to earn $4.8 every year for forever. If the annual interest rate is 6.2%, what is the NPV of this project? Suppose you considering investing $24 to earn $6.6 every year for forever. If the annual interest rate is 6.5%, what is the NPV of this project?
You have a potential project for which you want to establish the value of any possible real options. The project will have an initial cost of $86 million, which must be paid at the time of investment. You realize that the project has four possible cash flows starting in year 1 and continuing forever. First, there is a 22% chance of earning $1.02 million per year starting in year 1. Second, there is a 26% chance of earning $6.54 million per year starting in year 1. Third, there is a 20% chance the the project will earn $5.82 million per year. Fourth, there is a chance that the project will earn $3.22. These are the only four possibilities. In 2 year(s), you will be able to improve the quality of your manufacturing process to increase the net CFs from the project if you would like to. The cost of this will be $62 million, and the cash flows will increase beginning immediately when you make this investment (the CFs increase starting the same year that you pay the improvement cost) and…
Company ABC invests in a long-term project that will start generating cash flows 10 years from now (and will then continue generating cash flows forever). The first cash flow is going to be equal to $22 million. Cash flows will then grow 2% per year forever. If the project costs $460 million today, is it a good investment if interest rates are (and are going to be forever) equal to 5%?
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?
Ivy's Ice Cream is looking at an opportunity that would require an investment of $900,000 today. The investment will provide cash flows of $250,000 in the first year, $400,000 in the second year, and $600,000 in the third year. If the interest rate is 8%, what is the NPV of this investment opportunity? Should Ivy's Ice Cream move forward with this investment based on the NPV? (Round your answer to the nearest whole dollar.)
For a major plant expansion project, a company wants to have $63 million 5 years from now If the company that t will have the $63 milion 5 years from now? The funds earn interest at the rate of 10% per year.
Suppose you considering investing $33 to earn $5.9 every year for 9 years. If the annual interest rate is 4.8%, what is the payback of this project? Suppose you considering investing $22 to earn $4.0 every year for 7 years. If the annual interest rate is 3.4%, what is the payback of this project?
The company has a project with a 5-year life that requires an initial investment of $200,000, and is expected to yield annual cash flows of $62,500. What is the net present value of the project if the required rate of return is set at 8%? Calculation Steps Present Value of an Annuity of $1 at Compound Interest. Net Present Value = ( $fill in the blank x fill in the blank ) – $fill in the blank Note: Round your answer to the nearest whole dollar. What NPV does the previous calculation yield? $fill in the blank
24. You are evaluating a project that will cost $534,000, but is expected to produce cash flows of $128,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is ____years. b. If you want to increase the value of the company you (will/will not) take the project since the NPV is (negative/positive) **round to two decimal places**
9. Hard Spun Industries (HSI) has a project that it expects will produce a cash flow of $3.7 million in 13 years. To finance the project, the company needs to borrow $2.5 million today. The project will also produce intermediate cash flows of $250,000 per year that HSI can use to service coupon payments of $125,000 every six months. Based on the risk of this investment, market participants will require a 9.5% yield. If HSI wishes a maturity of 13 years (matching the arrival of the lump sum cash flow), what does the face value of the bond have to be? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis. (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.) Enter answer here

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