Erie Shipping, which currently transports goods in ships across oceans, is considering project A, which would involve transporting goods in trains over railroadtracks. For most of its existence, Erie Shipping transported goods in ships, trains, and trucks. Project A would require an initial investment of $29,100.00 and isexpected to produce annual cash flows of $2,738.00 each year forever with the first annual cash flow expected in 1 year. What is the NPV of project A, basedon the information in this paragraph and the following table and applying the pure play approach to determining a project's cost of capital?FirmLine of BusinessErie ShippingTransports goods in ships across oceansWACC11.89 percentThomas ShippingCB TruckersTransports goods in trains over railroad tracks 9.01 percentTransports goods in trucks on roads16.76 percentDiversified Shipping Transports goods in ships, trains, and trucks13.27 percent$-12763.48 (plus or minus $10)$-6072.25 (plus or minus $10)$1288.46 (plus or minus $10)$-8466.99 (plus or minus $10)None of the above is within $10 of the correct answer

Part 2: Approach to solving the question:To calculate the NPV of project A using the pure play…

Answered: Erie Shipping, which currently…

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

See similar textbooks

Similar questions

Calculating IRR, payback, and a missing cash flow. the merriweather printing company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows. year. Project cash flows 0 ? 1 $780,000 2 $420,000 3 $310,000 4 $480,000 if you know that the project has a regular payback of 2.6 years, what is the project's IRR?
Channel Tunnel Inc. plans to build an additional 23-mile-long tunnel under the English Channel for added train service. The cost (NINV) of the tunnel is expected to be $4.3 billion. Net cash inflows are expected to equal $764 million per year. How many years must the firm generate this cash inflow stream for investors to earn their required 17 percent rate of return?
You must calculate the value of a container handling equipment for a terminal, which produces year end annual cash flows of $1,200 the first year, $2,000 the second year, $3,000 the third year, and $4,000 the fourth year.A) Assuming a weighted average cost of capital of 15 percent, what is the value of this equipment using the net present value (NPV) approach? B) If the cost of this equipment is $5,200 for the terminal, calculate the net present value. Would you buy this equipment for your terminal?
Channel Tunnel Inc. plans to build an additional 23-mile-long tunnel under the English Channel for added train service. The cost (NINV) of the tunnel is expected to be $3.2 billion. Net cash inflows are expected to equal $793 million per year. How many years must the firm generate this cash inflow stream for investors to earn their required 24 percent rate of return? Use Table IV to answer the question. Round your answer to the nearest whole number. years
Sagar
Blur Corp. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project’s life. If demand is strong, the facility will be able to generate annual cash flows of $250,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $120,000. Blur Corp. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? -$66,346 -$63,187 -$34,753 -$44,231 Blur Corp. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the…
Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0 1 2 3 4 5 6 7 8 9 37,857.14 60,714.29 96,428.57 157,857.1 203,571.4 132,142.9 117,857.1 85,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should…
A construction company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted WACC is 12%. Calulate the Payback with and without mitgationwhat is the discounted payback with and without mitigation?Should the project be undertaken? If so, should the firm do mitigation? (hint: discuss all the criterias you have calculated in earlier parts)How should the environmental effects be dealt with when this project is evaluated
A Builder company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted weighted average cost of capital is 12%. Calculate the Net Present Value and IRR with and without mitigation. Should the project be undertaken? If so, should the firm do mitigation?
(Calculating project cash flows and NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $80,000 per year. The machine has a purchase price of $100,000, and it would cost an additional $6,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $14,000. This machine has an expected life of 10 years, after which time it will have no salvage value. Also, assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 35 percent marginal tax rate, and a required rate of return of 9 percent. a. What is the initial outlay associated with this project? b. What are the annual after-tax cash flows associated with this project for years 1 through 9? C. What is the terminal cash flow in year 10 (that is, the annual after-tax cash flow in year 10 plus any…
Wildhorse Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. The firm uses an 18 percent discount rate for projects like this. Should management go ahead with the project? Year 0 1 2 3 4 5 Cash Flow -$3,485,400 871,710 896,700 1,104,400 1,340,360 1,450,600 What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to O decimal places, e.g. 1,525.) The NPV is $
Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $228,000 and would yield the following annual cash flows. 1. Assuming that the company requires a 12% return from its investments, use net present value to determine which projects, if any, should be acquired. 2. Using the answer from part 1, is the internal rate of return higher or lower than 12% for Project C2?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

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

SEE MORE TEXTBOOKS