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 ifit 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 $1million 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 10 percent, should the Rhine Company set a price of $7,000 or $10,000?a. NPV $8.4M for $10,000 priceb. NPV $10.0M for $10,000 pricec. NPV $7.9M for $7,000 priced. NPV $10.0M for $7,000 price

Calculation of present value of earning (PVOE) using excel when the price of product is $10,000:

Answered: If the Rhine Company ignores the…

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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A company is developing a new product. The development of the product requires an initial investment of $150,000 with further investments of $70,000 in year 1, $40,000 in year 2 and $20,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $70,000. The company's required rate of return is 7%. a. Calculate the NPV for this product. -$37,562.00 8) Round to the nearest cent b. Should the company proceed with developing the product?
Totally Tanked, Inc. sells tank tops. The firm is considering making some changes in order to achieve its goal of increasing its profit.If it makes no changes, the company anticipates the following for the coming year. Maria, one of the company’s managers suggests the following: “I think if we cut our price to $17 a tank top, we will increase our sales to 3,700,000 tank tops. I think that will help us achieve our goal” Question: Mr. Big, the CEO, upon hearing Maria’s plan says “This is great! We should go forward with your plan since we will increase sales by 700,000 tank tops.” How would you answer Mr. Big? # of tank tops to be sold 3,000,000 Selling price per tank top $20 Variable expense per tank top $8 Fixed expenses for the year $20,000,000
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Please help me with this question
These are the values I was solving for, but I'm being told the $6,393,505.38 is incorrect. Not sure what I'm doing wrong. Thanks!
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
You are considering entering the shoe business. You believe that you have a narrow window for entering this market. Because of Christmas demand, the time is right today, and you believe that exactly a year from now would also be a good opportunity. Other than these two windows, you do not think another opportunity will exist to break into this business. It will cost you $35 million to enter the market. Because other shoe manufacturers exist and are public companies, you can construct a perfectly comparable company. Hence, you want to use the Black-Scholes formula to decide when and if you should enter the shoe business. Your analysis implies that the current value of your shoe company would be $40 million, and that the volatility is 25% per year. Of the $40 million current value, $6 million is coming from the free cash flows expected in the first year. The risk-free rate is 4%. What is the value of the investment opportunity if you choose to wait? (Hint: think of the investment as a…
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $5.0 million. The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The after-tax WACC for Howell is 13 percent. The machine can be sold for $600,000 at T=4. What is the cash flow at T=0? What is the cash flow at T=1? What is the cash flow at T=4? What is the NPV of the project?
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer- assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $3.5 million in annual pretax cost savings. The system costs $9.4 million and will be depreciated straight-line to zero over five years. Wildcat's tax rate is 21 percent, and the firm can borrow at 8 percent. Lambert Leasing Company is willing to lease the equipment to Wildcat. Lambert's policy is to require its lessees to make payments at the start of the year. Suppose it is estimated that the equipment will have an aftertax residual value of $1,025,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter yuor answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) Maximum lease payment

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