Suppose your firm has limited capital to invest in new R&D. Two lines of innovation (referred to as projects) have been proposed by managers. Project 1 costs $120,000 up front today, but generates $50,000 in additional profits at the end of each of the next 4 years. Project 2 costs $90,000 in upfront costs, generating an additional $50,000 in profits at the end of each of the next three years. Assume a discount rate of 10%. which of the following best characterizes how the firm ought to prioritize the projects? O Prefer project 1 to project 2 because project 1 has a higher B/C Ratio. O Prefer project 2 to project 1 because project 2 has a higher NPV. O Prefer project 2 to project 1 because project 2 has a higher B/C Ratio. O Prefer project 1 to project 2 because project 1 has a higher NPV.

Suppose your firm has limited capital to invest in new R&D. Two lines of innovation (referred to as projects) have been proposed by managers. Project 1 costs $120,000 up front today, but generates $50,000 in additional profits at the end of each of the next 4 years. Project 2 costs $90,000 in upfront costs, generating an additional $50,000 in profits at the end of each of the next three years. Assume a discount rate of 10%. which of the following best characterizes how the firm ought to prioritize the projects? O Prefer project 1 to project 2 because project 1 has a higher B/C Ratio. O Prefer project 2 to project 1 because project 2 has a higher NPV. O Prefer project 2 to project 1 because project 2 has a higher B/C Ratio. O Prefer project 1 to project 2 because project 1 has a higher NPV.

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

Assume that you are thinking about starting your own small business. You have made the following estimates regarding this opportunity: You can rent a location for your business at a cost of $36, 000 per year. The equipment costs incurred to start the business would total $250,000. The equipment would have a 5-year useful life and a salvage value of S 25,000. Your company's estimated sales per year would equal $350,000 and its variable cost of goods sold would be 30% of sales. Other operating costs would include $56, 000 per year in salaries, S4, 000 per year for insurance, $25, 000 per year for utilities, and a 3% sales commission. The payback period for this investment opportunity is closest to: Multiple Choice 4.08 years, 2.20 years. 3.80 years. 3.08 years.
I attached the image of the question.
Suppose your company needs $17 million to build a new assembly line. Your target debt- equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,5667.) a. Flotation cost b. Amount raised %
Not Using Excel You must find the payback for a project, and you have misplaced some of the information that you weregiven. You know that the project will generate positive cash flows of $60,000 per year at the end of each ofthe next 5 years, that its NPV is $75,000, and that the company's WACC is 10%. What is the project's regularpayback? Hint: You must first find the project's cost, then use it to find the payback.
You are considering adding a new product to one of your firm’s existing product lines which will generate an additional $200,000 in sales per year and will have a margin of 50% (same as the existing group margin). This will entail an increase in Net Working Capital of $10,000 and an investment in property, plant, and equipment of $50,000 per year. Assuming the company pays no tax and any depreciation in that year is negligible, the annual change in Unlevered Free Cash Flows resulting from the addition of the product is: a $40,000 b $50,000 c $90,000 d $100,000 e $10,000
The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 11 percent. The project being analyzed is as follows ($26.000 investment): Use Appendix A and Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow $ 12,000 11,000 9,000 What is the modified internal rate of return? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Internal rate of return 11.45%
Suppose Canadian Tire is considering investing in warehouse-management software that costs $500,000, has $50,000 residual value, and should lead to cost savings of $120,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?
Assume that you are thinking about starting your own small business. You have made the following estimates regarding this opportunity: • You can rent a location for your business at a cost of $36,000 per year. The equipment costs incurred to start the business would total $250,000. The equipment would have a 5-year useful life and a salvage value of $25,000 Your company's estimated sales per year would equal $350,000 and its variable cost of goods sold would be 30% of sales. • Other operating costs would include $58,000 per year in salaries, $4,000 per year for insurance, $25,000 per year for utilities, and a 3% sales commission The simple rate of return for this investment opportunity is closest to: Multiple Choice 22.0% 19.0% 26.6% 15.7%
You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $150 million (time 0). The product will generate free cash flow of $8 million the first year, and this free cash flow is expected to grow at a rate of 3.5% per year. Markum has an equity cost of capital of 12%, a debt cost of capital of 5%, and a marginal tax rate of 40%. Markum plans to finance the project with perpetual debt of $100 million that has an interest rate of 4%. Calculate the PV of the project using the APV method. Group of answer choices 192 162 82 252
When the country’s economy is expanding, AB Investment Company is optimistic and expects a MARR of 15% for new investments. However, ina receding economy the expected return is 8%. Normally a 10% return is required. An expanding economy causes the estimates of asset life to godown about 50%, and a receding economy makes the n values increase about 20%. Which plan should be selected if the company president expects the economy to be (a) expanding, and (b) receding?
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.49 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.6%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 34%, and a debt-equity ratio of 2.4. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)
An investment with total costs of $10,000 will generate total revenues of $11,000 for one year. Management thinks that since the investment is profitable, it should be made. Do you agree? What additional infromation would you want? If funds cost 12 percent, what would be your advice to management? Would your answer be different if the cost of capital is 8 percent?

SEE MORE QUESTIONS

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