Shoe Building Inc. is considering a three-year project that will require an initial investment of $55,000. It has estimated that the annual cash flows for the project under good conditions will be $40,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is your answer to the nearest whole dollar.) Shoe Building Inc. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be able to invest $5,000 in year 2 to generate an additional cash flow of $18,000 in year 3. If conditions are bad, the firm will not make any further investments in the project. Using the information from the preceding problem, the expected NPV of this project-when taking the growth option into account-is (Note: Round your answer to the nearest whole dollar.) Shoe Building Inc.'s growth option is worth (Note: Round (Note: Round your answer to the nearest whole dollar.)

Shoe Building Inc. is considering a three-year project that will require an initial investment of $55,000. It has estimated that the annual cash flows for the project under good conditions will be $40,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is your answer to the nearest whole dollar.) Shoe Building Inc. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be able to invest $5,000 in year 2 to generate an additional cash flow of $18,000 in year 3. If conditions are bad, the firm will not make any further investments in the project. Using the information from the preceding problem, the expected NPV of this project-when taking the growth option into account-is (Note: Round your answer to the nearest whole dollar.) Shoe Building Inc.'s growth option is worth (Note: Round (Note: Round your answer to the nearest whole dollar.)

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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Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that you borrow $30,000 in financing the project. According to MM proposition II, the firm's equity cost of capital will be closest to: A. 15% B. 25% C. 17% D. 20%
Alpha Industries is considering a project with an initial cost of $8.1 million. The project will produce cash inflows of $1.46 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.64 percent and a cost of equity of 11.29 percent. The debtequity ratio is .61 and the tax rate is 39 percent. What is the net present value of the project?
Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $470,000 and has a present value of all its cash flows of $2,350,000. Project 2 requires an initial investment of $5,000,000 and has a present value of all its cash flows of $6,000,000. (a) Compute the profitability index for each project. (b) Based on the profitability index, which project should the company select? Complete this question by entering your answers in the tabs below. Required A Required B Compute the profitability index for each project. Profitability Index Numerator: Denominator: Profitability Index = Profitability index Project 1 Project 2
Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £38,000 for year 1; £43,000 for year 2 and £50,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate. d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places). e) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc.
Alpha Industries is considering a project with an initial cost of $8.8 million. The project will produce cash inflows of $1.68 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.85 percent and a cost of equity of 11.43 percent. The debt-equity ratio is .68 and the tax rate is 40 percent. What is the net present value of the project? O $695,448 O $772,720 O $662,331 $803,629 O $439,544 A
General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $40,000. If market demand is strong, General Forge and Foundry Co. thinks that the project will generate cash flows of $29,500 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $1,750 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 10%, what will be the expected net present value (NPV) of this project? -$914 -$972 -$1,143 -$1,257
Galbraith Co. is considering a four-year project that will require an initial investment of $9,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be –$1,500 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 11%? $24,135 $36,203 $30,169 $25,644
Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,600, has a five-year life, and has no residual value after five years. The company's cost of capital is 10.99%. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV across the three scenarios. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year Pessimistic 1 $6,720 2 7,310 8,730 4 7,850 5 5,840 $9,320 13,270 ITTI Expected cash inflows Most likely Optimistic $11,750 10,320 11,680 10,720 15,830 12,780 7,730 8,820 For the pessimistic scenario, the NPV is $ (Round to the nearest cent.)
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to:
Blue Llama Mining Company is analyzing a project that requires an initial investment of $3,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $325,000 Year 2 –100,000 Year 3 425,000 Year 4 500,000 1. Blue Llama Mining Company’s WACC is 7%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 17.53% -20.06% 22.14% 16.61% 2. If Blue Llama Mining Company’s managers select projects based on the MIRR criterion, they should accept or reject this independent project. 3. Which of the following statements about the relationship between the IRR and the MIRR is correct? A typical firm’s IRR will be equal to its MIRR. A typical firm’s IRR will be less than its MIRR. A typical firm’s IRR will be greater than its MIRR.
F1
Herman Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst-case cash flows are projected to be –$1,000 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 13%?

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