question is - Suppose two firms (A and B) are considering investing in new technology which is specific to a joint project lasting up to three years. The costs and benefits of investment depend upon the decisions of both firms.
question is - Suppose two firms (A and B) are considering investing in new technology which is specific to a joint project lasting up to three years. The costs and benefits of investment depend upon the decisions of both firms.
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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question is - Suppose two firms (A and B) are considering investing in new technology which is specific
to a joint project lasting up to three years. The costs and benefits of investment depend
upon the decisions of both firms.
![Suppose two firms (A and B) are considering investing in new technology which is specific
to a joint project lasting up to three years. The costs and benefits of investment depend
upon the decisions of both firms.
Firm A's costs/revenues ($000s)
Firm A invests
Firm A invests
Firm B invests
Firm B doesn't invest
Year
1 2 3
Year
1 2
3
Revenues 20 60 60
Revenues 20
20
Costs
-50 0 0
Costs
-50
-10 0
Firm A doesn't invest
Firm A doesn't invest
Firm B invests
Firm B doesn't invest
Year
1 2
3 Year
1 2
3
Revenues 40
20
0| Revenues 10
10
Costs
-5
0 Costs
18
Assume that:
the interest rate (r) is r = 10%.
Year 1 costs/revenues occur at the end of the present period, i.e. in arrears (so
discounting is required), Year 2 costs/revenues occur at the end of Year 2, etc
Note, the flows occur in arrears (so discounting is required), ie. X = [1/(1 +r)*]Y.
For each of the four scenarios, calculate:
1. the total Present Value of revenues for Firm A.
2. the total Present Value of costs for Firm A.
3. the Net Present Value (NPV) of profit for Firm A.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1b2e65f2-c472-45bf-885c-00dffce84016%2F7bbbca98-79c2-432b-afe2-ac6688d1706a%2Fwbpl7p5_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose two firms (A and B) are considering investing in new technology which is specific
to a joint project lasting up to three years. The costs and benefits of investment depend
upon the decisions of both firms.
Firm A's costs/revenues ($000s)
Firm A invests
Firm A invests
Firm B invests
Firm B doesn't invest
Year
1 2 3
Year
1 2
3
Revenues 20 60 60
Revenues 20
20
Costs
-50 0 0
Costs
-50
-10 0
Firm A doesn't invest
Firm A doesn't invest
Firm B invests
Firm B doesn't invest
Year
1 2
3 Year
1 2
3
Revenues 40
20
0| Revenues 10
10
Costs
-5
0 Costs
18
Assume that:
the interest rate (r) is r = 10%.
Year 1 costs/revenues occur at the end of the present period, i.e. in arrears (so
discounting is required), Year 2 costs/revenues occur at the end of Year 2, etc
Note, the flows occur in arrears (so discounting is required), ie. X = [1/(1 +r)*]Y.
For each of the four scenarios, calculate:
1. the total Present Value of revenues for Firm A.
2. the total Present Value of costs for Firm A.
3. the Net Present Value (NPV) of profit for Firm A.
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