If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? (Mote: Do not roundIntermediate calculations and round your answer to the nearest whole dollar.)-$7,874Ⓒ-$6,630-$8,288O-$9,531St. Margaret Beer Co. has the option to delay starting this project for one year so that analysts can gather more information about whether demandwill be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only atwo-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it.What will be the expected NPV If St. Margaret Beer Co. delays starting the project? (Note: Do not round Intermediate calculations and round youranswer to the nearest whole dollar.)$1,880Ⓒ$1,410What is the value of St. Margaret Beer Co's option to delay the start of the project? (Note: Do not round Intermediate calculations and round youranswer to the nearest whole dollar.)O $1,880 Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about thepotential project. This opportunity to wait before making the decision is called the investment timing option.Consider the case:St. Margaret Beer Co. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong,St. Margaret Beer Co. thinks that the project will generate cash flows of $28,500 per year. However, if market demand is weak, thecompany believes that the project will generate cash flows of only $1,750 per year. The company thinks that there is a 50% chance thatdemand will be strong and a 50% chance that demand will be weak.If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? (Note: Do not roundintermediate calculations and round your answer to the nearest whole dollar.)O-$7,874O-$6,630O-$8,288

Investment timing option:The investment timing option refers to the strategic decision made by…

St. Margaret Beer Co. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, St. Margaret Beer Co. thinks that the project will generate cash flows of $28,500 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.

St. Margaret Beer Co. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, St. Margaret Beer Co. thinks that the project will generate cash flows of $28,500 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.

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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Turner Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $320,000 the first year, $265,000 the second year, and $230,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period. First enter the formula, then calculate the payback period. (Round your answer to two decimal places.) Full years Amount to complete recovery in next year Projected cash inflow in next year )= Payback )= years
Rotterdam Corp. (RC) is considering a new two-year project. RC estimates that there is a 25% probability that cash flows in two years will be €250,000, a 30% probability that the cash flows will only be €200,000 and a 45% probability the cash flows will be €350,000. The cost of the project is €220,000. The project’s cost of capital is 15% and the risk-free rate is 5%. What is the NPV of the project if financed with 100% equity? If the €220,000 cost of the project is financed with all equity, then what is the rate of return on the unlevered equity? If the project is financed with 30% debt (at the risk-free rate), what is the expected return on the levered equity?
Galbraith Co. is considering a four-year project that will require an initial investment of $7,000. The base-case cash flows for this project are projected to be $14,000 per year. The best-case cash flows are projected to be $26,000 per year, and the worst-case cash flows are projected to be –$4,500 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 12%? $30,587 $29,058 $35,175 $36,704 Galbraith now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project…
Winters Corp. is considering a new product that would require an investment of $18 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $9 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market does not like the product, then the cash flows would be only $4 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak, but it would have to incur costs to obtain this timing option. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. The project's WACC is 11%. What is the value (in thousands) of the option to delay the project?
Caroline’s Chill Chronometers (3C) is considering buying a machine for $600 million. The machine has a useful life of 20 years. Sales are projected to be $120 million per year, with operating expenses of $35 million per year. An initial NWC investment of $10 million would be needed. NWC, however, would decrease by $300,000 per year over the 15 year life of the project due to improved inventory efficiency. The machine can be sold for $175 million at the end of the project. The tax rate is 20% and the required rate of return is 7%. Find the NPV using straight-line depreciation.
Brewster’s is considering a project with a 5-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts? Select one: a. $23,617 b. $23,719 c. $25,002 d. $26,877 e. $28,745
Jensen Shipping is considering a project that has an initial cost of $218,000. The project will produce aftertax cash flows of $49,000 a year forever. The firm's WACC is 15.8 percent and its tax rate is 34 percent. Equity has a flotation cost of 14.0 percent while the flotation cost for debt is 2.0 percent. What is the net present value of this project, including the flotation costs, if the firm's debt-equity ratio is .5? (Rounded) Multiple Choice $62,501 $53,088 $47,088 $67,904
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. It is considering the introduction of a "weight loss" smoothie. The project would require a $4 million investment outlay today (t = 0). The after-tax cash flows would depend on whether the weight loss smoothie is well received by consumers. There is a 30% chance that demand will be good, in which case the project will produce after-tax cash flows of $2 million at the end of each of the next 3 years. There is a 70% chance that demand will be poor, in which case the after-tax cash flows will be $1 million for 3 years. The project is riskier than the firm's other projects, so it has a WACC of 12%. The firm will know if the project is successful after receiving first year's cash flows. After receiving the first year's cash flows it will have the option to abandon the project. If the firm decides to abandon the project the company will not receive any cash flows after t = 1 , but it will be able to sell the assets…
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?
Blur Corp. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project’s life. If demand is strong, the facility will be able to generate annual cash flows of $250,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $120,000. Blur Corp. 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 13%, what will be the expected net present value (NPV) of this project? -$66,346 -$63,187 -$34,753 -$44,231 Blur Corp. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the…
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

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