8.38 A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based com- pany. Due to the risk involved, the rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. Due to revenue projections, the company will move forward only if the AW of total costs is be- low $5.7 million per year. The M&O costs are es- timated at $3.1 million per year. The anticipated sales price of the company in 5 years could be $2.1 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward sensitive to the loan interest rate and sales price estimates?

8.38 A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based com- pany. Due to the risk involved, the rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. Due to revenue projections, the company will move forward only if the AW of total costs is be- low $5.7 million per year. The M&O costs are es- timated at $3.1 million per year. The anticipated sales price of the company in 5 years could be $2.1 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward sensitive to the loan interest rate and sales price estimates?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 16P: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...

See similar textbooks

Similar questions

JFINEX Corporation is considering a new project that will cost 150,000. The project is expected to generate equal annual cash flows over the next seven years. The required return for this project is 8%. What is the project's internal rate of return if the profitability index is 1.1?" Lower than 8% Higher than 8% 8% None of the above
Winters Corp. is considering a new product that would require an investment of $18 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $9 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market does not like the product, then the cash flows would be only $4 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak, but it would have to incur costs to obtain this timing option. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. The project's WACC is 11%. What is the value (in thousands) of the option to delay the project?
| 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
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
None
F1.
None
Feldman Corp. is considering a new product that would require an investment of $8 million at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $3.4 million 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 $1.85 million per year. There is a 65% probability that the market will be good. Foltz 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. $144,867.15 b. $269,039.00 c. $357,188.00 d. $413,906.15 e. $455,296.77
Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. the initial outlay would be $11,700,000, and the project would generate cash flows of $1,200,000 per year for 20 years. the appropriate discount rate is 6.7%. A. Calculate the NPV b. Calculate the PI C. Calculate the IRR D. should this project be accepted? why or why not?
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
Home Automation is considering an investment of $500,000 in a new product line. The company will make the investment only if it will result in a rate of return of 15% per year or higher. If the revenue is expected to be between $138,000 and $165,000 per year for 5 years, use a present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue.
We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 x 5,400 = $367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. What is the base-case NPV? (Do not round Intermedlate calculations and round a. your answer to 2 decimal places, e.g., 32.16.) After the first year, the project can be dismantled and sold for $1.250,000. If expected sales are revised based on the first year's performance, below what level of expected b. sales would it make sense to abandon the project? (Do not round Intermedlate calculotions and round your answer to the nearest whole number, e.g., 32.)