Problem 5-8 (Algo)3Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. Thecompany is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for newproducts is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the smallfacility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. The second option isto build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in discounted revenueswith the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, theprobability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in noadditional revenue being generated because the current factories cannot produce these new products.a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers inmillions rounded to 1 decimal place.)PlansSmall facility $Do nothingLarge facilityNPV69 690.7$ 0millionmillion2.5 millionb. The best decision to help Expando isto build the small facility.to do nothing.to build the large facility.

NPV is the net present value is the difference between the present value of cash flow and initial…

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. I products is low, the company expects to receive $9 million in discounted revenues (present value of future reven facility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factor additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter y millions rounded to 1 decimal place.) Plans Small facility Do nothing NPV $ 0.7 million $ 0 million

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. I products is low, the company expects to receive $9 million in discounted revenues (present value of future reven facility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factor additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter y millions rounded to 1 decimal place.) Plans Small facility Do nothing NPV $ 0.7 million $ 0 million

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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Waterway Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $57,000. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,500. At the end of 8 years, the company will sell the truck for an estimated $28,100. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%. Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign…
Dobbs Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $55,981. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,900. At the end of eight years, the company will sell the truck for an estimated $28,400. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Pavel Chepelev, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%. 1. Calculate the cash payback period and net present value of the proposed investment.
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $303,000, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space. A small office building could be purchased for sole use by the corporation at a total price of $5.1 million, of which $900,000 of the purchase price would represent land value, and $4.2 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $540,000 per year for a term of…
The management of Origami Company, a wholesale distributor of beachwear products, is considering purchasing a $30,000 machine that would reduce operating costs in its warehouse by $5,000 per year. At the end of the machine's eight-year useful life, it will have no scrap value. The company's required rate of return is 11%. (Ignore income taxes.) Required: 1. Determine the net present value of the investment in the machine. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.) Net present value 2. What is the difference between the total undiscounted cash inflows and cash outflows over the entire life of the machine? Net cash flow
Lobster Seafood Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to generate an annual after-tax cost reduction of $105,000 forever. The corporation has a total value of $65 million and has outstanding debt of $45 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent? $244,843 $150,409 $480,584 $67,715
If the Rhine Company ignores the possibility that other firms may enter its market, it should set a price of $10,000 for its product, which is a power tool. But if it does so, other firms will begin to enter the market. During the next two years it will earn $4 million per year, but in the following two years it will earn $1 million per year. On the other hand, if it sets a price of $7,000, it will earn $2.5 million in each of the next four years because no entrants will appear. If the interest rate is 8 percent, should the Rhine Company set a price of $7,000 or $10,000? a. NPV $10.0M for $7,000 price b. NPV $10.0M for $10,000 price c. NPV $7.3M for $7,000 price d. NPV $8.7M for $10,000 price

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