John decided to purchase a firm which is expected to generate net cash flows of $5,000 o year from now, $2,000 at the end of each of the next five years and a $10,000 in seven yea rom now. Investments of similar characteristics and risk in the market have a discount rate 10%. (a) Determine the value of the firm. (15) (b) What is the incremental value (NPV) of this acquisition if the initial investment made John is $12,000? (10) Note: Show your answers in tables and all calculations properly presented.

John decided to purchase a firm which is expected to generate net cash flows of $5,000 o year from now, $2,000 at the end of each of the next five years and a $10,000 in seven yea rom now. Investments of similar characteristics and risk in the market have a discount rate 10%. (a) Determine the value of the firm. (15) (b) What is the incremental value (NPV) of this acquisition if the initial investment made John is $12,000? (10) Note: Show your answers in tables and all calculations properly presented.

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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The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year 1 2 3 4 5 Free cash flow −860 −430 0 236 772 Estimate the target’s maximum acquisition price. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Estimate the target’s maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.
You have an opportunity to invest $50,600 now in return for $60,800 in one year. If your cost of capital is 7.9%, what is the NPV of this investment?
John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $501 million and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70.7 million and its cost of capital is 12.0%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeas go ahead with the purchase? d. How far off could OpenSeas's cost of capital estimate be before your purchase decision would change? SITTE a. Prepare an NPV profile of the purchase. To plot the NPV profile, we compute the NPV of the project for various discount rates and plot the curve. The NPV for a discount rate of 2.0% is $ million. (Round to one decimal place.)
Ivy's Ice Cream is looking at an opportunity that would require an investment of $900,000 today. The investment will provide cash flows of $250,000 in the first year, $400,000 in the second year, and $600,000 in the third year. If the interest rate is 8%, what is the NPV of this investment opportunity? Should Ivy's Ice Cream move forward with this investment based on the NPV? (Round your answer to the nearest whole dollar.)
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
A new investment offers TimeTek future cash flows of $Q in six years and SP in 12 years. Assuming a negative interest rate of throughout the entire time, TimeTek will pay up to $50,000 today to receive these future cash flows. If the interest rate becomes zero (r=0%), what will TimeTek be willing to pay for these same cash flows $Q and SP? O Less than $50,000 O $50,000 O Not enough information to determine More than 50,000
12. The ABC Company is considering undertaking an investment that promises to have the following cash flows: period 0, −$50; period 1, $90. If the firm waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay −$60 in period 1 and $100 in period 2. Assume a time value of money of 0.05. Which investment should the firm undertake? Use the net present value and the internal rate of return methods.
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $499 million and will operate for 20 years. Open Seas expects annual cash flows from operating the ship to be $70.5 million and its cost of capital is 12.2%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeas go ahead with the purchase? d. How far off could OpenSeas's cost of capital estimate be before your purchase decision would change? a. Prepare an NPV profile of the purchase. To plot the NPV profile, we compute the NPV of the project for various discount rates and plot the curve. The NPV for a discount rate of 2.0% is $ million. (Round to one decimal place.)

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