Project A requires an investment of 1 milliontoday and pays out 5 million in expectationnext years. Project B requires an investmentof $10 million today and pays out $ 20 millionin expectation next year. Project B has highidiosyncratic risk and no systematic risk, whileProject A is risk free. The two projects aremutually exclusive. Assume the risk free rate isif >0%, Given these assumptions. Project Ahas a higher NPV than Project B.

Net Present Value The Net Present Value (NPV) is a financial analysis technique for assessing the…

Project A requires an investment o today and pays out 5 million in exp next years. Project B requires an in of $10 million today and pays out S in expectation next year. Project B idiosyncratic risk and no systematic Project A is risk free. The two proje

Project A requires an investment o today and pays out 5 million in exp next years. Project B requires an in of $10 million today and pays out S in expectation next year. Project B idiosyncratic risk and no systematic Project A is risk free. The two proje

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Project A requires an investment of 1 million
today and pays out 5 million in expectation
next years. Project B requires an investment
of $10 million today and pays out $ 20 million
in expectation next year. Project B has high
idiosyncratic risk and no systematic risk, while
Project A is risk free. The two projects are
mutually exclusive. Assume the risk free rate is
if >0%, Given these assumptions. Project A
has a higher NPV than Project B.

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A proposed project has a funding requirement of $1M, an NPV of $5M at r = 7% per year, an IRR of 14% per year, and very little risk. Yet it is rejected by the senior management team. What other factor could be wrong with the project proposal? A. Discount Factor too high B. Funding C. Salvage Value D. Time to Payback E. Cumulative Cash Flow not sufficient
A project has an initial investment of $104. You have come up with the following estimates of the project's cash flows (there are no taxes): Revenues Costs Pessimistic Most Likely $17 12 Multiple Choice Suppose the cash flows are perpetuities and the cost of capital is 10 percent. Conduct a sensitivity analysis of the project's NPV to variations in revenues. (Answers appear in order: [Pessimistic, Most Likely, Optimistic].) -$104,-$34, $76 -$34, $36, $66 -$54, $66, $66 $24 10
How do I determine which is the correct answer for this problem? A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. Project A has average risk and an IRR = 9 percent. b. Project B has below-average risk and an IRR = 8.5 percent. c. Project C has above-average risk and an IRR = 11 percent. d. All of the projects above should be accepted. e. None of the projects above should be accepted. Please answer fast I give you upvote.
None
solve it correctly. not use excel
2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C
Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC or cost of capital Net investment cost (depreciable basis) The salvage value of its equipment No other fixed assets will be acquired for following years The company will require an increase in net working capital at the $10,000 beginning The company will liquidate all working capital at the end of the project -10,000 Units sold (constant through years) 60,000 $30.00 $50,000 $17.00 Average price per unit, Year 1 Fixed operating…
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39. Deyland Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC = 9%. Year 0 a. $24.71 b. $27.46 c. $30.51 d. $33.90 e. $37.29 1 2 3 4 CF, -$1,100 $375 $375 $375 $375 CF₂ $2,200 $725 $725 $725 $725
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 9.25% CFS CFL 1 2 3 4 -$1,200 $405 $405 $405 $405 -$2,400 $780 $780 $780 $780 0 a. $0.00 b. $210.59 c. $120.02 d. $8.26 e. $7.56
A company considering a project with extremely risky cash flows decides to apply a premium to the discount rate used to evaluate the project. The management of the company has set the following limits regarding the use of premia on discount rates: If the CV of the project is less than 1, no premium is added. If the CV of the project is 1 or more, but less than 1.5, the discount rate is multiplied by 1.5 If the CV of the project is 1.5 or more, the discount rate is multiplied by 2. The project under consideration has a CV of 1.5 while the company’s WACC is 10%. What would the discount rate employed to evaluate the project be?
Assume a project has normal cash flows. All else equal, which of the following statements is correct? A project's regular payback increases as the WACC declines. OA project's IRR increases as the WACC declines. A project's NPV declines as the WACC declines. 4 A project's discounted payback increases as the WACC declines. O A project's MIRR is unaffected by changes in the WACC. None of the above statement.

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