Question: A Wiley publisher offers you the rights to produce a romantic movie based on a novel about to be published - cost is 5 million pounds. Previous experience indicates the novel has a 50/50 chance of success or failure. If successful, the movie will earn a PV of 75 million pounds. If a flop, the movie will make a loss of 75 million pounds (development & promotion). What is the traditional NPV of this project? What would be the NPV of this project with the use of real options?

Question: A Wiley publisher offers you the rights to produce a romantic movie based on a novel about to be published - cost is 5 million pounds. Previous experience indicates the novel has a 50/50 chance of success or failure. If successful, the movie will earn a PV of 75 million pounds. If a flop, the movie will make a loss of 75 million pounds (development & promotion). What is the traditional NPV of this project? What would be the NPV of this project with the use of real options?

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 10P: Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit...

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A Wiley publisher offers you the rights to produce a romantic movie based on a novel about to be published – cost is £5m Previous experience indicates the novel has a 50/50 chance of success or failure If a success the movie will earn a PV of £75m If a flop the movie will make a loss of £75m (development & promotion) What is the traditional NPV of this project? What would be the NPV of this project with the use of real options? A Wiley publisher offers you the rights to produce a romantic movie based on a novel about to be published – cost is £5m Previous experience indicates the novel has a 50/50 chance of success
XYZ Co. hires a financial consultant to help evaluate whether or not to launch a new line of perfumed shark attractants. The consultant charges a fee of $10,000, half of which must be paid up-front and half to be paid when the project evaluation is completed. The consultant’s fees can be considered a/an _______ of the project. Select one: a. financing cost b. sunk cost c. opportunity cost d. side effect e. cash outflow
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Consider Decision Tree Analysis Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business? The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?
1. An investor is pondering on whether to invest in a siomai franchise or in a printing press company. He had his staff analyze the cost benefits that he would get from the two business ventures and they came up with this report. A. The siomai franchise would need Php 800 000 as capital. It has a 60-percent chance of profiting Php 400 000; a 15-percent chance of profiting Php 600 000; and 25- percent chance of losing the capital entirely. B. The paper manufacturing company would need Php 800 000 as capital. It has a 35- percent chance of earning Php 1000 000 and a 65-percent chance of losing the capital entirely. C. Which between the two business ventures should the investor invest his Php 800 000?
The Dragons (from CBC's Dragon's Den) are considering a venture from an Albertan entrepreneur. His proposal requires the Dragons to invest $500,000 immediately. Based on market conditions, the product is estimated to have year-end profits of $100,000//$200,000//$300,000//$200,000//and finally $100.000. The Dragons will invest only if the internal rate of return exceeds their cost of capital lof 20%. Should they invest?
Excellent Yachting is considering acquiring Turquoise Tours. Management believes Turquoise Tours can generate cash flows of $228,000, $224,000, and $189,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 12.5 percent, what is the maximum Excellent Yachting should pay today to acquire Turquoise Coast? $519,799.59 O $538,615.08 O $545,920.61 O $512.395.06 O None of these answers are correct
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Consider Decision Tree Analysis If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment? Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits?
You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project. Up-front cost: $100,000 • Next year's revenue: $15,000 . Real interest rate: 7% • Depreciation rate: 3% ● How much profit does the project yield, and should your client invest in the project? No, the client should not invest because the project yields a $10,000 loss. Yes, the client should invest because the project yields a $50,000 profit. No, the client should not invest because the project yields a $15,000 loss. Yes, the client should invest because the project yields a $15,000 profit.
An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant. a-1.Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions.) a-2.Would you build the plant? Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful. b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.) b-2. Would you build the plant?
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An auto plant that costs $170 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $240 million if the line is successful but only $80 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant. a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.) a-2. Would you build the plant? Suppose that the plant can be sold for $140 million to another automaker if the auto line is not successful. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.) b-1. Calculate the expected NPV. b-2. Would you build the plant?