We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $75 × 6,100 = $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,200. Note that abandonment is an option if the project is a failure. a. If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $75 × 6,100 = $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,200. Note that abandonment is an option if the project is a failure. a. If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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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Your firm is considering a project that will cost $4.59 million up front, generate cash flows of $3.52 million per year for 3 years, and then have a cleanup and shutdown cost of $6.01 million in the fourth year. a. How many IRRS does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.9%.
The company is considering two projects. The initial investment in the Project A and Bare $50,000 and $60,000 respectively. The Project A will generate annual cash flows of$26,000 for four years and the Project B will generate annual cash flows of $30,000 forfour years. What must be the required rate of return, so that the company will beindifferent between these two projects?(A)The required rate of return must be 21.86%.(B) The required rate of return must be 37.42%.(C)The required rate of return must be 34.90%.(D) The required rate of return must be 31.39%.
We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 × 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 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.) 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.)
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 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.
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%?
Fargo Inc. is considering a project that will require an initial investment of $1.5 million. The project will provide incremental cash inflows of $600,000 for the next five years. If the required return on the project is 15%, what is its discounted payback? If the company’s investment cutoff threshold is three years, should the project be given the go-ahead? Select one: a. 3 years and 4.55 months; yes b. 3 years and 4.55 months; no c. 4 years and 11.55 months; yes d. 4 years and 11.55 months; no e. 5 years and 1 month; no
Winview 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 outflows, and the project has a cost of capital of 12%. b. What is the project's NPV? Its IRR? Its MIRR?
You are considering investing $15,000 in a project today. This project will generate $6,500 per year for five years. The first cash flow comes at the end of Year 3. What is the net present value of this project if the required rate of return is 10 percent?
A project that costs $1000 today is expected to have cash flows of $200/year for 10 years. Under these projections, this is a positive NPV project: if your cost of capital is 10%/year, investing $1000 today and earning $200 per year for 10 years yields an NPV of $228.91 (you can verify this yourself, or take my word for it). However, those annual cash flows of $200 are based on the following expectations: A 50% probability that business will be good and the project will earn $300/year, and a 50% probability that business will be bad and the project will earn $100/year. (Note that the expected annual cash flows will be: [0.5 * $300] + [0.5 * $100] = $200/year, as stated above.) Unfortunately, you will not know which state of the world you will be in until you spend the $1000 and start the business; in year 1, after the business opens, you will find out. Obviously, if you open for business and business is good, you will want to stay open for the entire 10 years; if your cost of capital…
You are considering opening a new plant. The plant will cost $97.5 million up front and will take one year to build. After that it is expected to produce profits of $29.1 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.)
Pendleton Products has a project requiring an initial cash investment of $3,100. The project is expected to return $1,000 each period for the next 5 periods, and it has a discount rate of 4%.1. Determine how long it will take, if at all, for the project to have a positive payback.Present value formula:
You are considering opening a new plant. The plant will cost $102.6 million up front and will take one year to build. After that it is expected to produce profits of $30.9 million at the end of every year of production (starting two years from now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.) make the investment. (Select from the drop-down menu.) You The IRR is%. (Round to two decimal places.) The maximum deviation allowable in the cost of capital estimate is %. (Round to two decimal places.)

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