A company has a project with initial investment is $40,000. It will generate $15,000 annually for the nextfour years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., Rm)is 2%6, and the market return (i.e., Rm) is 7%6?. How much is the NPV of this project? [Hint: As discussed, theCAMP model can be used to estimate discount rate (r) in the NPV analysis equation).A)5,555B)3,3334,444D)6,666

Initial Investment =$ 40,000 Annual Cash flows = $ 15000 Years = 4 Beta = 2.0 Risk Free return(Rf) =…

A company has a project with initial investment is S40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., Rm) is 2%, and the market return (i.e., Rm) is 7%6?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate (r) in the NPV analysis equation). A) 5,555 B) 3,333 4,444 D) 6,666

A company has a project with initial investment is S40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., Rm) is 2%, and the market return (i.e., Rm) is 7%6?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate (r) in the NPV analysis equation). A) 5,555 B) 3,333 4,444 D) 6,666

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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A firm is considering three possible one-year investments, which we will name X, Y, and Z. ∙ Investment X would cost $10 million now and would return $11 million next year, for a net gain of $1 million. ∙ Investment Y would cost $100 million now and would return $105 million next year, for a net gain of $5 million. ∙ Investment Z would cost $1 million now and would return $1.2 million next year, for a net gain of $200,000. The firm currently has $150 million of cash on hand that it can loan out at 15 percent interest. Which of the three possible investments should it undertake? a. X only. b. Y only. c. Z only. d. X and Y. e. X and Z. f. X, Y, and Z.
Elizabeth Corporation is starting two new projects. Project A requires an investment of $5,000, has expected return of 16% with standard deviation 14%. Project B has initial investment of $15,000, expected return of 15% with standard deviation 10%. The correlation coefficient between the projects is 0.75. Find the expected return, in dollars, of the portfolio of these two projects. What is the probability that this return is less than $4,000? COMPLETE AND SHOW WORK IN EXCEL
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. c. Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, calculate the value of the firm's levered equity from the project. What is the cost of capital for the firm's levered equity? d. What is the basic goal of financial management with respect to capital structure? Is there an easily identifiable capital structure that will maximize the value of the firm? Why or why not?
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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow: 0 2 3 4 5 -$5,400 $1,600 $2,800 $2,000 $2,000 $1,800 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) 6 $1,600
You are considering opening a new plant. The plant will cost $95.1 million up front and will take one year to build. After that it is expected to produce profits of $31.8 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.6%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.)
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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 1 2 3 4 Cash flow: -$5,000 $1,270 $2,470 $1,670 $1,670 5 6 $1,470 $1,270 Use the Pl decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) PI Should it be accepted or rejected? O rejected O accepted
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Assume a company is going to make an investment of $300,000 in a machine and the following are the cash flows that two different products would bring in years one through four. The company's required rate of return is 12%. What is the NPV for Option A? What is the NPV for Option B? What is the IRR for Option A? What is the IRR for Option B? PLEASE NOTE #1: The dollar amounts will be with "$" and commas as needed and rounded to two decimal places (i.e. $12,345.67). Round your IRR answers, in percentage format, to two decimal places (i.e. 12.34%). Given the above answers, which project should the company invest in? Project . PLEASE NOTE #2: Your answer is either "A" or "B" - capital letter, no quotes.
You are considering a project that will cost $50,000 to set up, and will pay out $18,000 1,2,3 and 4 years from today. The unlevered beta for this project is 1.2, the risk free rate is 6.5%, and the expected return on the S&P 500 is 15%. Corporate taxes are 25%. a. What is the unlevered cost of equity for this project? b. What is the NPV of this project if you finance with all equity? c. You are considering borrowing $30,000 to finance this project, with repayment in 4 years. You could normally borrow at 7.5%. The Nebraska state government has offered to lend you the money at 6%. What is the adjusted present value of this project if you take the subsidized loan?

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