a. Compute the net present value of this project assuming it possesses average risk. b. Because of the risk inherent in this type of investment, Seminole has decided to employ the certainty equivalent approach. After considerable discussion, man- agement has agreed to apply the following certainty equivalents to the project's cash flows: Year at 1.00 1 0.95 2 0.90

a. Compute the net present value of this project assuming it possesses average risk. b. Because of the risk inherent in this type of investment, Seminole has decided to employ the certainty equivalent approach. After considerable discussion, man- agement has agreed to apply the following certainty equivalents to the project's cash flows: Year at 1.00 1 0.95 2 0.90

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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Concept explainers

Risk Management Techniques

Risk management is the procedure of recognizing, analyzing, monitoring, and preventing the risks and threatening factors of investments and business. Risks can arise from various factors including internal controls, market changes, natural disasters, and failure in productions. Risk management techniques enable entities to control and minimize the risks as well as the threatening factors of the business and it also helps to improve the business.

Question

11. The Seminole Production Company is analyzing the investment in a new line of
business machines. The initial outlay required is $35 million. The net cash flows
expected from the investment are as follows:
INTERMEDIATE
Year
Net Cash Flow (Million)
1
$5
2
8
3
15
4
20
15
10
7
4
The firm's cost of capital (used for projects of average risk) is 15 percent.
a. Compute the net present value of this project assuming it possesses average risk.
b. Because of the risk inherent in this type of investment, Seminole has decided to
employ the certainty equivalent approach. After considerable discussion, man-
agement has agreed to apply the following certainty equivalents to the projecť's
cash flows:
Year
at
1.00
1
0.95
2
0.90
3
0.80
4
0.60
5
0.40
0.35
7
0.30
If the risk-free rate is 9 percent, compute the project's certainty equivalent net
present value.
c. On the basis of the certainty equivalent analysis, should the project be accepted?

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(Related to Checkpoint 11.1 and Checkpoint 11.4) (IRR and NPV calculation) The cash flows for three independent projects are found below: a. Calculate the IRR for each of the projects. b. If the discount rate for all three projects is 13 percent, which project or projects would you want to undertake? c. What is the net present value of each of the projects where the appropriate discount rate is 13 percent? a. The IRR of Project A is%. (Round to two decimal places.) Data table Year 0 (Initial investment) Year 1 Year 2 Year 3 Year 4 Year 5 Project A $(70,000) $12,000 18,000 19,000 28,000 33,000 Project B $(110,000) $28,000 28,000 28,000 28,000 28,000 Project C $(420,000) $240,000 240,000 240,000
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 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
The answer is project B but please answer why that is the correct answer. Engineering economic question
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Consider cash flows for the following investment projects (MARR = 15 %). Suppose that projects are mutually exclusive. Which project would you select based on AE criterion? Project A -3000 Project B -3500 ProjectC 4000 1400 1100 1500 2. 1650 1000 1500 3. 1300 1000 1800 1800 4 750 1000
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $6,500 and has an expected life of 3 years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,250 0.2 $ 0.6 6,500 0.6 6,500 0.2 6,750 0.2 19,000 BPC has decided to evaluate the riskier project at 11% and the less-risky project at 8%. a. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent. Project A: $ Project B: Project B's standard deviation (OB) is $6,185 and its coefficient of variation (CVB) is 0.80. What are the values of gg and CVA? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places. OA: $ CVA:
Matterhorn Mountain Gear is evaluating two projects with the following cash flows: Year Project X Project Y 0 −$ 316,200 −$ 293,450 1 147,700 138,100 2 165,200 155,300 3 130,300 121,050 What interest rate will make the NPV for the projects equal?
For project A, the cash flow effect from the change in net working capital is expected to be $480.00 at time 2 and the level of net working capital is expected to be $750.00 at time 1. What is the level of current assets for project A expected to be at time 2 if the level of current liabilities for project A is expected to be $2,580.00 at time 2? $2,310.00 (plus or minus $10) $3,810.00 (plus or minus $10) $1,350.00 (plus or minus $10) $2,850.00 (plus or minus $10) None of the above is within $10 of the correct answer

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