4. Investment timing optionsCompanies often need to choose between making an investment now or waiting until the company can gather more relevant information about thepotential project. This opportunity to wait before making the decision is called the investment timing option.Consider the case:Tolbotics Inc. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, TolboticsInc. thinks that the project will generate cash flows of $29,000 per year. However, if market demand is weak, the company believes thatthe project will generate cash flows of only $2,000 per year. The company thinks that there is a 50% chance that demand will be strongand a 50% chance that demand will be weak.If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project? (Note: Do not roundintermediate calculations and round your answer to the nearest whole dollar.)-$7,111O-$6,433O-$7,788O-$6,772Tolbotics Inc. has the option to delay starting this project for one year that analysts can gather more information about whether demand will bestrong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it.What will be the expected NPV if Tolbotics Inc. delays starting the project? (Note: Do not round intermediate calculations and round your answer tothe nearest whole dollar.)O $2.237O $2,013$2,684O $9,009Show Transcribed TextWhat is the value of Tolbotics Inc.'s option to delay the start of the project? (Note: Do not round intermediate calculations and round your answer tothe nearest whole dollar)O $2,684O $9,009O $2,013O $2,237Show Transcribed Text5. Flexibility optionsO-$31,643O-$15,822O-$33.225Blur 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 usefullife, 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$265,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $125,000. Blur Corp. thinks that there is a 50%chance that demand will be strong and a 50% chance that demand will be weak.O-$20,568If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project?O $91,856O $36,742SBlur Corp. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the productsthey produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the company switches product lines becauseof low demand, it will be able to generate cash flows of $260,000 in years 2 and 3 of the project.O $60.213ĆCWhat is the expected NPV of this project if Blur Corp. decides o invest the additional $10,000 to give themselves a flexibility option? (Note: Do notround your intermediate calculations.)O $82,670What will be the value of Blur Corp.'s flexibility option?Show Transcribed Text

Since you have asked multiple questions, we will solve the first question for you. If you want any…

If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) -$7,111 -$6,433 -$7,788 O-$6,772 Tolbotics Inc. has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two- year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV if Tolbotics Inc. delays starting the project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) O $2,237 O $2,013 12,684 O $9,009 Show Transcribed Text What is the value of Tolbotics Inc.'s option to delay the start of the project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) 12,684 O $9,009 $2,013 J $2,237

If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) -$7,111 -$6,433 -$7,788 O-$6,772 Tolbotics Inc. has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two- year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV if Tolbotics Inc. delays starting the project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) O $2,237 O $2,013 12,684 O $9,009 Show Transcribed Text What is the value of Tolbotics Inc.'s option to delay the start of the project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) 12,684 O $9,009 $2,013 J $2,237

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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You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 125,000 units per year Unit price: $240 Variable cost: $144 Fixed cost: $5,430,000 The project will last for 10 years and requires an initial Investment of $21.78 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12% However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $230. The good news is that fixed costs could be as low as $3,620,000, and variable costs would decline in proportion to sales. a. What is project NPV If all variables are as expected? Note: Do not round Intermediate calculations. Enter your answer in thousands not in…
Wavy Inc is examining a project that requires an initial investment of -10 million today. This will be followed by several years of positive incremental after-tax cash flows. However, during the last year of the project's life Wavy expects that the incremental cash flow will again be negative. By which method should Wavy determine whether or not to invest? A) Both NPV or IRR are fine, as they must arrive at same investment decision B) IRR, because there will be no NPV solution in this case C) Neither NPV or IRR are useful in this situation D) NPV, since this project will have two IRRs
Please ignore the already green checked marked questions.
| Frontier Corp. is considering a new product that would require an after-tax investment of $1,400,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be good. Tsai Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $108,226.89 b. $137,743.32 c. $167,259.75 d. $196,776.18 e. $216,453.79
The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 -$ 76,000 -$ 34,000 1 29,000 11,000 23,500 17,500 2 3 36,000 42,000 a-1. If the required return is 12 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 12 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the net present value decision rule, which project should it take? a-1. Project I a-2. Project II b-1. Project I b-2. Project II
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 29,000 1 13,000 2 16,000 3 12,000 What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 12 percent, should the firm accept this project? multiple choice 1 Yes No What is the NPV for the project if the required return is 24 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 24 percent, should the firm accept this project? multiple choice 2 Yes No
A project that costs $2,300 to install will provide annual cash flows of $730 for each of the next 5 years. a. Calculate the NPV if the opportunity cost of capital is 12%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV b. Is this project worth pursuing? Yes O No c. What is the project's internal rate of return IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.) %24
Find the modified internal rate of return (MIRR) for a proposed project costing $12,513. Assume that the appropriate cost of capital for projects of this risk level, at this company is 10.96%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22% , please enter 20.22- do not include the % symbol, and use at least two decimal places). Year 1 $7,261 Year 2 $4,832 Year 3 $9,441.2 Year 4 $13,000 Year 5 $12,638
Generro Company is considering the purchase of equipment that would cost$60,000and offer annual cash inflows of$16,300over its useful life of 5 years. Assuming a desired rate of return of10%, is the project acceptable? (PV of \$1 and PVA of \$1) (Use appropriate factor(s) from the tables provided.) Mitiple Choice The answer cannot be detergined. No, since the negative net present value indicates the investmeot will yield a fate of retum below the desred tate of return. Yes, since the investment will generate$81.500in future cosh flows, which is gremer than the purchase cont of$60,000Yes, since the positve net present valse ind cates the investment will eam a rate of return greater than10 h.
1) Rainbow Corp. is considering an investment whereby it will invest $100 in a perpetuity that will pay the firm $30 annually forever, starting one year from now. If the firm has a payaback period of 3 years, will it do the project? a) Yes b) No 2) If Rainbow has a cost of capital of 10%, will it invest in the project when doing an NPV analysis? a) Yes b) No
Bluekettle Inc. is considering a project that has the following cash. What is the project's NPV(net present value) if you use a required rate of 14% ? If the NPV is negative, put the minus sign in front of your answer, such as -200.56. Note that a project's projected NPV can be negative, in which case it will be rejected. Year 0 1 2 3 Cash flows - $6,500 $1,600 $3,700 $7,500
Border Mining, Inc., is trying to evaluate a project with the following cash flows: Year Cash Flow 0 −$ 39,300,000 1 63,300,000 2 − 12,300,000 a-1. What is the NPV for the project if the company requires a return of 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a-2. Should the firm accept this project?

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