OBasic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity.The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflowsassociated with each project. These estimates are shown in the following table.Initial investment (CF)OutcomePessimisticMost likelyOptimisticProject A$12,500Annual cash inflows (CF)$8901,6502,440Project B$12.500(EXER)$1,5401,6501,800a. Determine the range of annual cash inflows for each of the two projects.b. Assume that the firm's cost of capital is 9.3% and that both prolects have 19-vear lives. Construct a table showing the NPVs for

In order to calculate range of project we calculate the total cash flow of the project which is…

Answered: Basic scenario analysis Prime Paints is…

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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Question Sun Plc has been specially formed to undertake two investment opportunities. The risk and return characteristics of the two projects are shown below: X Y Expected Return 10% 20% Risk (standard deviation) 4% 7% Sun plans to invest 60% of its available funds in Project X and 40% in Project Y. The directors believe that the correlation coefficient between the returns of the projects is +0.18. Required: i. Calculate the expected return from the proposed portfolio of Projects X and Y. ii. Calculate the risk of the portfolio and comment upon your result in the context of the risk reduction effect of diversification. iii. How could Sun Plc invest its funds in order to obtain a minimum-risk portfolio? -----
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A risky $420,000 investment is expected to generate the following cash flows: Year 1 2 3 4$ 102,700 $ 163,030 $ 160,824 $ 135,200 If the firm’s cost of capital is 12 percent, should the investment be made?. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar.NPV: $ Should The investment be made? An alternative use for the $420,000 is a four-year U.S. Treasury bond that pays $25,200 annually and repays the $420,000 at maturity. Management believes that the cash inflows from the risky investment are equivalent to only 70 percent of the certain investment, which pays 6 percent. Should the investment be made? Use Appendix B to answer the question. Do not round other intermediate calculations. NPV: $ Should The investment be made?
i Explain how wrong calculation of the cost of capital of a project leads toincorrect choice of a project. ii Explain the superiority of the Security Market Line (SML) approach ascompared to the dividend valuation model. iii A company is faced with the choice of one of two investment opportunities Aand B. The initial cost of each is Rs.200,000 and their estimated cash flows areas follows.Year Cash Flows (Rs.) – A Cash Flows (Rs.)- B1 200,000 40,0002 240,000 60,000Assuming a cost of capital of 7% calculate (year 1: .935; year 2: .873)a. NPVb. The yield rate of each projectc. Say which project you would select
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You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 18% 20% State 2: Economic growth 42% 16% State 3: Economic decline 30% 3% State 4: Depression 10% -25% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. O 7.35%, 12.99% O2.18%, 1.69% O 8.72%, 12.99% O3.50%, 1.69%
True or False Assume that the riskfree rate of return is 5% p.a. and that an investment project costs $150,000 and is expected to generate a risky net cash flow next year of $180,000. The project is acceptable as its internal rate of return exceeds the riskfree rate of return.
Exploring Finarice Cost or Capital with Dereasing Casn Flow This graph shows the net present value of an investment with annual cash flows of -$1,000, $500, $400, $300, and $100 as a function of different costs of capital (interest %). Note that this cash flow returns declining amounts after the initial investment. Drag left or right on the graph to move the cursors to see the net present value (NPV) for different costs of capital. The point where the curve crosses the X-axis determines the internal rate of return (IRR). (Note: due to limited pixel resolution, it is sometimes difficult to get to that precise point.) NPV = CFo+E=t CF $500 (1+0,1000)!T (1+0, 1000)? + (1+0. 1000 + T+0 1000y4 = $78.82 =-$1, 000 + $400 $300 NPV ($) 500- 400 - 300 200- 100- 78.82 10 10 -100- Cost of Capital (%) Created by Gary H. McClelland, Professor Emeritus University of Colorado Boulder O Cengage Learning. All Rights Reserved. 9:41 PM 80°F e to search 8/10/2021 lyp
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