8. The Tyler and Maria Corporation is evaluating a project to setup a plant to manufacture electronic gadgets to enhance automobile performance. According to the CFO, the business appears to be profitable with growth opportunities in the Northeastern corridor. The project will provide a net cash inflow of $250,000 for the firm during the first year. Cash flows are projected to grow at a rate of 2.8 percent per year forever. The project requires an initial investment of $3,700,000. A) If the company requires a return of 9 percent on such projects, should the business be started? B) Provide your analysis to justify your position.

8. The Tyler and Maria Corporation is evaluating a project to setup a plant to manufacture electronic gadgets to enhance automobile performance. According to the CFO, the business appears to be profitable with growth opportunities in the Northeastern corridor. The project will provide a net cash inflow of $250,000 for the firm during the first year. Cash flows are projected to grow at a rate of 2.8 percent per year forever. The project requires an initial investment of $3,700,000. A) If the company requires a return of 9 percent on such projects, should the business be started? B) Provide your analysis to justify your position.

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

See similar textbooks

Similar questions

The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will provide a net cash inflow of $95,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1,480,000. a-1 What is the NPV for the project if the company's required return is 11 percent? b. The company is somewhat unsure about the assumption of a growth rate of 4 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 11 percent on investment?
Hilton Hotels is very interested in developing a new hotel in Zambia. The company estimates that the hotel would need an initial investment of $20 million. Hilton Hotel expects the hotel will generate positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. i.What is the project's net present value? ii. Hilton Hotel expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Zambia government imposes a large hotel tax. One year from now, Hilton Hotel will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Hilton Hotel is deciding whether to proceed with the hotel today or to wait a year to find out…
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $124,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.7 percent per year forever. The project requires an initial investment of $1,470,000. a. If the company requires a return of 13 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. The company is somewhat unsure about the assumption of a growth rate of 5.7 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 13 percent on its investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
This is a two-part question. Scotch can expand a successful manufacturing line for an immediate investment of $91 million. The company anticipates that the project will generate a cash flow of $172 million in 10 years (and only in that one year). The company considers the required rate of return of the project to be 12.60% PART 1. Calculate the project's internal rate of return: % Notes on Formatting: Place your answer in PERCENTAGE form with two decimal places of accuracy. For example, if your answer is thirteen point seventy five percent, then place your answer as 13.75 and NOT as .1375. NOW GO ON TO THE SECOND PART! PART 2. Given your estimate of the IRR, should Scotch accept or reject the project? Type the word "accept" if you believe they should go ahead with the project or the word "reject" if you believe they should not go ahead with the project.
Amber Company is considering a one-year project that requires an initial investment of $500,000. However, to raise this capital, the company will incur flotation costs that are 2% of the initial investment amount. At the end of the year, the project is expected to produce a cash inflow of $576,000. What is the rate of return that the company expects to earn on this project after taking flotation costs into consideration?Your answer should be between 7.32 and 16.60, rounded to 2 decimal places, with no special characters. Your answer should be between 7.32 and 16.60, rounded to 2 decimal places, with no special characters.
The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $8 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $9 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 10%. Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.632 and that the risk-free rate is 5%. Do not round intermediate calculations. Enter your…
A company is developing a special vehicle for Arctic exploration. The development requires an initial investment of $80,000 and investments of $50,000 and $42,000 for the next two years, respectively. Net returns beginning in Year 4 are expected to be $44,000 per year for 10 years. If the company requires a rate of return of 14%, compute the net present value of the project and determine whether the company should undertake the project. The net present value of the project is S (Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as needed.)
Management of Crane Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $209,550 and will generate cash flows of $83,750 over each of the next six years. If the cost of capital is 11 percent, what is the MIRR on this project?
A fin-tech firm is considering devising a new payment system. The initial cost for developing this system will be $20 million today. Once the system development is completed, in one year, the system will be sold to a major bank for $25 million. Assume that both the development of the system and the sale of the project for $25 million are certain. The firm can pay $20 million of investment entirely using its own cash. Or the firm can also raise funds to finance part of the investment by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. What is the NPV of this project if the fin-tech firm invests its own money and does not issue the new security? What is the NPV if the firm issues the new security? Briefly explain your answer by comparing the NPVs
Ibuku Property Development Company is refurbishing a 200-unit condominium complex at a cost of $5,250,000. It expects that this will lead to expected annual after tax cash flows of $900,000 for the next ten years. What internal rate of return can the company earn from this project?
Caroline’s Chill Chronometers (3C) is considering buying a machine for $600 million. The machine has a useful life of 20 years. Sales are projected to be $120 million per year, with operating expenses of $35 million per year. An initial NWC investment of $10 million would be needed. NWC, however, would decrease by $300,000 per year over the 15 year life of the project due to improved inventory efficiency. The machine can be sold for $175 million at the end of the project. The tax rate is 20% and the required rate of return is 7%. Find the NPV using straight-line depreciation.
A new diamond deposit has been found in northern Alberta. Your researchers have determined that it will cost $4.5 million to purchase the land and prepare it for mining. Starting at the end of the second year, the lode is expected to earn net profits of $3 million, which will be sustained for three years before the deposit is depleted. Calculate the IRR on the diamond mine. If the cost of capital is 21%, should the deposit be aquired?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS