Mad Scientist, Inc. is considering investing into the nanotechnology business. After conductinga detailed due diligence process, the company's board decided that the current cost of entryinto the nanotechnology business is too high. The board also thinks that the commercializationof technological advancements will eventually drive costs down and the company should getinto the nanotech business one or two years from now, when they can realize a higher NPV ontheir investment. Given the above, the board has chosen the option to:ExpandAbandonDelay

Please refer below page.If you have any doubts please feel free to ask.Explanation:Step 1:DELAY- The…

Answered: Mad Scientist, Inc. is considering…

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

See similar textbooks

Similar questions

Pliable Corporation is trying to decide when to purchase a new computer system for its offices. The company's opportunity cost of capital is 10 percent annually. Analysts have projected that the cost of the computer system will fall over time due to improvements in manufacturing methods. Analysts have also estimated the present value—as of the date of purchase—of Pliable's savings from purchasing the computer system. These savings increase with the length of delay in purchasing the computers because of anticipated enhancements over time in computer capacity and speed. The table below shows both sets of estimates. A. Find the optimal date for Pliable to purchase the computer system, assuming that the future cash flows are subject to geometrically increasing risk. Explain your reasoning and show your work. B. Suppose instead that Pliable faces risk that is just one-period-ahead and that the risk-free rate of return is 3 percent. Find the optimal date for Pliable to purchase the…
During the past few years, Super Technologies has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC). The VP has provided you with the following information: The firms’ tax rate is 40%. The current market price of Super’s outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000. The current price of the firm’s preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annual dividend rate (paid annually). The current price of the firm’s common stock is $50 per share.…
During the last few years, Helney Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Helney’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:(1) The firm’s tax rate is 40%.(2) The current price of Harry Davis’s 12% coupon, semi-annual payment, noncallable bonds with 15 years remaining to maturity is $1,225.72. Helney does not use short-term interest-bearing debt on a permanent basis.(3) The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $117.(4) Helney’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends…
Green & Company is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $15.7 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $10.7 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Green's controller has concluded that the operation will most probably result in annual savings of $7.9 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $3.7 million per year for each of years 4 through 7. The company uses a 12 percent discount rate. Use Exhibit A.8. Required: Compute the NPV under the three scenarios. Note: Round PV factor to 3…
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $5,300 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 5,300 $ 4,700 Good .50 6,400 7,000 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the…
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’ cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: •The firm’s tax rate is 35%. •The current price of Harry Davis’ 12.5% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1105.67. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. •The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $114.27. Harry Davis would incur flotation costs…
ZipCar auto parts store has $88,000 to invest in a project to detect and reduce insier theft in their stores. They have considering investing in one of two alternatives, identified as Y and Z. Z is the higher first-cost alternative, and the incremental initial investment between the two is $22,000 and will exhibit a rate of return of 12% per year. Z requires an investment of $88,000. They expect a rate of return on the $88,000 investment of 49 percent. Answer the following questions; (a) what is the size of the investment required in Y?, and, (b) what is the rate of return on Y? The size of the investment required in Y is $ The rate of return on Y is %.
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 12%, and the projects' expected net costs are listed in the following table: a. What is the IRR of each alternative? The IRR of alternative 1 is -Select- Year 0 1 2 3 4 5 -Select- Expected Net Cost Forklift -$200,000 -160,000 -160,000 -160,000 -160,000 -160,000 Conveyor -$500,000 -120,000 -120,000 -120,000 -120,000 -20,000 The IRR of alternative 2 is-Select- b. What is the present value of costs of each alternative? Do not round Intermediate calculations. Round your answers to the nearest…
OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $6.0 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $820,000 per year in direct labor costs. The company requires a 12% return from its investments.1. Compute the proposed investment’s net present value.2. Using your answer from part 1, is the investment’s internal rate of return higher or lower than 12%?
OptiLux is considering Investing in an automated manufacturing system. The system requires an initial Investment of $6.0 million, has a 20-year life, and will have zero salvage value. If the system is Implemented, the company will save $740,000 per year in direct labor costs. The company requires a 10% return from Its Investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) a. Compute the proposed Investment's net present value. b. Using the answer from part a, is the investment's Internal rate of return higher or lower than 10%? Hint: It is not necessary to compute IRR to answer this question. Complete this question by entering your answers in the tabs below. Required A Required B Compute the proposed investment's net present value. Net present value
During the past few years, Super Technologies has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC). The VP has provided you with the following information: The firms’ tax rate is 40%. The current market price of Super’s outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000. The current price of the firm’s preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annual dividend rate (paid annually). The current price of the firm’s common stock is $50 per share.…
OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $4.6 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $700,000 per year in direct labor costs. The company requires a 11% return from its investments. Using Excel, compute the internal rate of return for the proposed investment.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS