Galbraith Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be - $3,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project's cost of capital is 12%? $12,299 $15,374 $13,837 $16,143 O O O O

Galbraith Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be - $3,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project's cost of capital is 12%? $12,299 $15,374 $13,837 $16,143 O O O O

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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Vijay
ABC Corp is considering a new project: the project requires an initial cost of $375,000, and will not produce any cash flows for the first two years. Starting in year 3, the project will generate cash inflows of $528,000 a year for three years. This project has higher risk compared to other projects the firm has, so it is assigned with a discount rate of 18%. What is the project's net present value? $773,016.1 $218,693.6 $449,487.3 $824,487.3 Oa b. C₂ d.
We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 × 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
F1
Herman Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst-case cash flows are projected to be –$1,000 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 13%?
A project’s initial cost is 13 million. The company expects a net cashflow of 10 million in year one, but the net cashflow is expected to decrease 1 million each year for the next years. If the company’s MARR is 12%, using NPW/NFW analysis is the project profitable in the first 5 years?
Lible, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)
WACC and NPV Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.82 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .85, a cost of equity of 12.2 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project?
A project that costs $1000 today is expected to have cash flows of $200/year for 10 years. Under these projections, this is a positive NPV project: if your cost of capital is 10%/year, investing $1000 today and earning $200 per year for 10 years yields an NPV of $228.91 (you can verify this yourself, or take my word for it). However, those annual cash flows of $200 are based on the following expectations: A 50% probability that business will be good and the project will earn $300/year, and a 50% probability that business will be bad and the project will earn $100/year. (Note that the expected annual cash flows will be: [0.5 * $300] + [0.5 * $100] = $200/year, as stated above.) Unfortunately, you will not know which state of the world you will be in until you spend the $1000 and start the business; in year 1, after the business opens, you will find out. Obviously, if you open for business and business is good, you will want to stay open for the entire 10 years; if your cost of capital…
The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%. One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8. Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
Kwon Jewelers is evaluating a 1-year project that would involve an initial investment in equipment of $32,000 and an expected cash flow of $36,000 in 1 year. The project has a cost of capital of 8.36 percent and an internal rate of return of 12.50 percent. If Kwon Jewelers were to use $32,000 in cash from its bank account to purchase the equipment, the net present value of the project would be $1,222.59. However, Kwon Jewelers has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the $32,000. If Kwon Jewelers were to borrow money to raise the $32,000, the interest rate on the loan would be 13.47 percent. Kwon Jewelers would receive $32,000 at the start of the project and would pay $36,310 one year later. What is the NPV of the project if Kwon Jewelers borrows $32,000 to pay for the project? $1,222.59 (plus or minus 3 dollars) $0.00 (plus or minus 3 dollars) $-273.55 (plus or minus 3 dollars) $1,509.04…

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