We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 × 5,400 = 5367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Option value %24

We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 × 5,400 = 5367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Option value %24

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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You are evaluating a project that will cost $508,000, but is expected to produce cash flows of $126,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11.3% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.)
A new project will have an intial cost of $40,000. Cash flows from the project are expected to be $5,000, $10,000, $15,000, and $25,000 over the next 4 years, respectively. Assuming a discount rate of 12%, what is the project's PI?
Aurum, Inc. is considering the purchase of new mining equipment. The equipment will cost $1,500,000 and will produce an incremental cash flow of $400,000 per year over its five-year life. The disposal value is expected to be $20,000. The company has a required rate of return of 10%. What is the NPV of the project?
The property is current selling for $400,000. You have forecasted, at the end of the fifth year we will assume the property will (or at least could) be sold for $500,000. If the required rate of return on projects of similar risk is 15%. ⦁ What is the net present value (NPV) of this investment project and should it be purchased? ⦁ What is the Internal Rate of Return offered by the project?
A project in NU will cost $200,000 for planning. and $40,000 in cach of the next six years. It is expected to generate $40,000 revenues per year permanently. Additional revenues will be gained in the pattern of an arithmetic gradient with $20,000 in the first year, declining by $4,000 per year to zero in the sixth year. What is the Rate of Return of this project?
Grayson Company is considering a purchase of equipment that costs $62,000 and is expected to offer annual cash inflows of $17,000. Grayson’s minimum required rate of return is 10%. How many years must the cash flows last for the investment to be acceptable ?
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Ace Investment Company is considering the purchase of the Apartment Arms project. Next year's NOI and cash flow is expected to be $2,080,000, and based on Ace's economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at least a 13 percent return on its investment. Required: a. Assuming the above facts, what would the estimated value for the property be now? b. What going-in cap rates should be indicated from recently sold properties that are comparable to Apartment Arms? c. What would the estimated value for the property, if the required return changes to 12 percent?
Denver Mart is considering a project with a life of five years and an initial cost of $136,000. The discount rate is 11 percent. The firm expects to sell 2,200 units a year with a cash flow per unit of $26. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $48,000. The firm is interested in knowing how the project will perform if the sales forecast for Years 4 and 5 of the project are revised such that there is a probability of 50 percent that the sales will be 1,000 units and a probability of 50 percent they will be 2,500 units a year. What is the net present value of this project given your sales forecasts? Multiple Choice A. $62,025 B. -$43,719 C. $6,877 D. $55,002 E. $23,617
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $213,000 per year. Once in production, the bike is expected to make $319,500 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 14%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? The present value of the costs is $ (Round to the nearest dollar.) The present value of the benefits is $. (Round to the nearest…
You are evaluating a project that will cost $500,000 but is expected to produce cash flows of $125,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. What is the payback period of this project? The payback period is ____ years. (Round to two decimal places)
Your firm is considering a project that requires in investment of $156,000 today. It is projected to pay $47,000 at the end of the year and at the end of the next two years after that (i.e., the cash flows at t = 1, 2, and 3 are all $47,000). Four years from today, the project is projected to pay $76,000. If the appropriate discount rate to value this project is 12% per year, what is the NPV ? Round and express your answer to the nearest whole dollar (i.e., nearest integer).

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