Use simple decision trees and a 10% per yeardiscount rate to evaluate a project, which has twophases. You may invest in the first, in both or inneither. You may not invest in the second phasewithout investing in the first. Phase 1 requires aninvestment of $100. One year later the projectdelivers either $160 or $60 with equal probability.At that time, after the phase 1 payout has beenreceived, you may invest an additional $100 forphase 2. One year later, phase 2 pays out either20% more cash than phase 1 actually delivered or (equally likely) 20% less. Assume no taxes. • Howmuch would the project be worth if it offered onlythe phase 1 opportunity? How much wouldphase 2 be worth if you had to choose today, onceand for all, whether or not to invest in it? • Howmuch is the project worth if you have access toboth phases and can wait to decide whether toinvest in phase 2? How would you allocate thevalue of the project between assets - in - place andreal options?

Approach to solving the question:Construct a decision tree representing the different phases of the…

Answered: Use simple decision trees and a 10% per…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
You are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent. A; What is the project’s payback period? B; What is the project’s NPV ? C; What is the project’s PI ? D; What is the project’s IRR ?
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Do the following problems. You must show your work.c) Find the IRR and MIRR of the following project and make your decision. Assume that the project's cost of capital (or WACC) is 4%. Project X that costs $30 million is expected to generate $13m per year for 3 years. Is this project acceptable?
Assume that you are considering several 5-year projects that have varying risk levels. You normally adjust your required return upward by 2% for higher-than-average risk projects and down by 2% for lower-than-average risk projects. The required return for average risk projects is 12%. After evaluating the risk of the projects under consideration, you have the following information: Project A B C Initial Investment ($50,000) ($50,000) ($50,000) Cash flows for years 1–5 14,000 14,750 13,500 Risk Level Average Above Average Below Average Calculate the payback period, IRR, NPV, MIRR and PI for each project using risk-adjusted discount rates. If the projects are independent, which would you accept? If they are mutually exclusive, which would you accept? Draw NPV profile for Project A…
A project will cost $20,000 today and yield cash inflows of $15,000 and $25,000 at the end of Year 1 and Year 2, respectively. At the end of Year 3, the project will require an additional clean-up cost of $5,000. The required rate of return for similar projects is 10%. What is the MIRR of this project if we use the discounting approach? Select one: a. 61.80% b. 48.03% c. 38.90% d. 26.67% e. 24.32%
You are evaluating a project that costs $75,000 today. The project has an inflow of $ 155,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the project? What discount rate results in the maximum NPV for this project? How can you determine that this is the maximum NPV?
Winston Clinic is evaluating a project that costs $52, 125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent. What is the project's payback? What is the project's NPV? Its IRR? Its MIRR? Is the project financially acceptable? Explain your answer.
You are evaluating a project that costs $75,000 today. The project has an inflow of $160,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the project? What discount rate results in the maximum NPV for this project?
Help NPV Calculate the net present value (NPV) for a 10-year project with an initial investment of $20,000 and a cash inflow of $6,000 per year. Assume that the firm has an opportunity cost of 18%. Comment on the acceptability of the project. The project's net present value is $ (Round to the nearest cent.) Тext ia Librai Calculat Resource Enter your answer in the answer box and then click Check Answer. Check Answer c Study 1 part remaining Clear All 10:27 PM unication Tools > 4/19/202 Type here to search insert fo 144
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time Project A Cash Flow Project B Cash Flow Use the payback decision rule to evaluate these projects, which one(s) should it be accepted or rejected? Multiple Choice 0 -35,000 -45,000 1 25,000 25,000 2 45,000 5,000 3 16,000 65,000
An investor is considering a project which requires an outlay of 3 million pounds initially (t = 0), and another outlay of one million pounds after one year (t = 1). After two years time (t = 2), when the project ends, they expect an inflow of 4.5 million pounds. What is the internal rate of return (IRR) of this project in percent?

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