question is - Suppose two firms (A and B) are considering investing in new technology which is specificto a joint project lasting up to three years. The costs and benefits of investment dependupon the decisions of both firms. Suppose two firms (A and B) are considering investing in new technology which is specificto a joint project lasting up to three years. The costs and benefits of investment dependupon the decisions of both firms.Firm A's costs/revenues ($000s)Firm A investsFirm A investsFirm B investsFirm B doesn't investYear1 2 3Year1 23Revenues 20 60 60Revenues 2020Costs-50 0 0Costs-50-10 0Firm A doesn't investFirm A doesn't investFirm B investsFirm B doesn't investYear1 23 Year1 23Revenues 40200| Revenues 1010Costs-50 Costs18Assume that:the interest rate (r) is r = 10%.Year 1 costs/revenues occur at the end of the present period, i.e. in arrears (sodiscounting is required), Year 2 costs/revenues occur at the end of Year 2, etcNote, 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.

Since, question is asking about only Firm A's revenue and cost, we will use scenario 2, where only…

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

See similar textbooks

Similar questions

Lopez Industries has identified the following two mutually exclusive capital investment projects: Year Project A Project B 0 -16000 -15500 1 400 12500 2 800 8000 3 13000 800 4 14000 800 What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
A firm will choose betwen two mutually exclusive projects. Project A costs $15,000 and pays out $25,000 in one year. Project B costs $30,000 and pays out $43,000 in one year. Project A's IRR equals 67% and its NPV = $8,585. Project B's IRR = 43% and its NPV = $10,566. Which project should the firm pick?
You are considering two similar but mutually exclusive investments. You have calculated that: Project A has an NPV = $7,600 and IRR = 19.80% Project B has an NPV = $11,200 and IRR = 17.30% Which project would you select? Project A O Project B
Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%? Cash Flow Project A Project B Year 0: –$15,000 Year 0: –$40,000 Year 1: 9,000 Year 1: 8,000 Year 2: 15,000 Year 2: 15,000 Year 3: 14,000 Year 3: 14,000 Year 4: 13,000 Year 5: 12,000 Year 6: 11,000 $13,512 $11,923 $15,897 $12,718 $10,333 Newtown Corp. is considering a five-year project that has a weighted average cost of capital of…
!
Unequal lives-ANPV approach Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 13.1% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2345678 u. VUIMMU BIV TRE Project X $78,000 $16,700 25,100 33,000 40,800 PETIT. Project X Project Z Project Y Project Y $52,000 Cash inflows (CF) $27,800 38,200 a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV. b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV c. Compare and contrast your findings in parts (a) and (b). Which project would you recommend that the firm…
Project S requires an initial outlay at t= 0 of $16,000, and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t= 0 of $27,500, and its expected cash flows would be $10,150 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Select the correct answer. Ca. Project S, because the NPVs > NPVL. Ob. Both Projects S and L, because both projects have IRR's > 0. Oc. Both Projects S and L, because both projects have NPV's > 0. Od. Project I because the NPVL > NPVs. Oe. Neither Project S nor L, because each project's NPV < 0.
3. Lopez Industries has identified the following two mutually exclusive capital investment projects: Year Project A Project B 0 1 2 3 4 -16000 400 800 13000 -15500 12500 8000 800 14000 800 What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct? If the required return is 11%, what is the NPV for each of these projects? Which project should the firm accept if they apply the NPV rule?
7. What is the payback period? ?
The following information is available on two mutually exclusive projects. All numbers are in ‘000s. Project Year 0 Year 1 Year 2 Year 3 Year 4 A $700 $300 $300 $400 $400 B $700 $600 $300 $200 $100 a: If the minimum acceptable rate of return is 10%, which project should be selected using the Net Present Value (NPV) method? Which project should be selected if the Internal Rate of Return (IRR) method is used? b: At what cross‐over rate would the firm be indifferent between the two projects? What is the NPV for both projects at the crossover rate? c: How much should cash flow in year 3 for project B increase or decrease in order for NPV(B) to be equal to NPV(A)?
Required information [The following information applies to the questions displayed below.] Kate's Candy Corporation makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Steve Bishop, the production manager at this facility, installed a packaging machine last year at a cost of $600,000. This machine is expected to last for 10 more years with no residual value. Operating costs for the projected levels of production, before depreciation, are $120,000 annually. Steve has just learned of a new packaging machine that would work much more efficiently in the production line. This machine would cost $696,000 installed, but the annual operating costs would be only $48,000 before depreciation. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $300,000. Steve has worked for Kate's Candy for 7 years. He plans to remain with the firm for about 2 more years, when he expects to become a vice president…
Required: a) Calculate the net present value of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). b) Calculate the internal rate of return of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). c) Calculate the discounted payback period of the project and comment on the results. d) Briefly discuss why good projects are very difficult to find as well as challenging to maintain or sustain

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

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

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