Citron buys a counterfeit production line at a price of €200,000. However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro): Demand / Year 1st 2nd 3rd High 100.000€ 120.000€ 130.000€ Normal 75.000€ 80.000€ 95.000€ Low 65.000€ 70.000€ 82.000€ a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?
Citron buys a counterfeit production line at a price of €200,000. However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro): Demand / Year 1st 2nd 3rd High 100.000€ 120.000€ 130.000€ Normal 75.000€ 80.000€ 95.000€ Low 65.000€ 70.000€ 82.000€ a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?
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
Related questions
Question
Citron buys a counterfeit production line at a price of €200,000.
However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro):
|
Demand / Year |
1st |
2nd |
3rd |
|
High |
100.000€ |
120.000€ |
130.000€ |
|
Normal |
75.000€ |
80.000€ |
95.000€ |
|
Low |
65.000€ |
70.000€ |
82.000€ |
- a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
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