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 operating cash flow is projected to be $75 x 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. 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.)

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 operating cash flow is projected to be $75 x 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. 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.)

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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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%?
Niagra Falls Power and Light is considering a project that will produce annual cash flows of $37,500, $46,200, $56,900, and $22,400 over the next four years, respectively. What is the internal rate of return if the project has an initial cost of $113,500?
A project requires an initial investment of $150,000 and promises four annual cash flows of $70k starting next year. If your required rate of return is 20% for a project of this risk, what is the projects Profitability Index?
A project is expected to cost $30,000, with the capital due immediately. Four annual cash flows are promised at the end of each respective year from the project as follows: Year 1: $4,000 Year 2: $12,000 Year 3: $33,000 The hurdle rate for the project is 12%. The manager wants projects to have a Payback of two years or less. 1.WHAT is the NPV of this project? 2.What is the Payback? 3.What is the IRR? 4.Do you accept the project?
Consider a new machine at a bottling plant that has a first cost of $250000, operating and maintenance costs of $15600 per year, and an estimated net salvage value of $23000 at the end of 30 years. Assume an interest rate of 7%. What is the annual equivalent cost of the investment if the planning horizon is 30 years? S
A project’s initial cost is 13 million. The company expects a net cashflow of 10 million in year one, but the net cashflow is expected to decrease 1 million each year for the next years. If the company’s MARR is 12%, using NPW/NFW analysis is the project profitable in the first 5 years?
Consider a new machine at a bottling plant that has a first cost of $150000, operating and maintenance costs of $18900 per year, and an estimated net salvage value of $16000 at the end of 30 years. Assume an interest rate of 5%. What is the annual equivalent cost of the investment if the planning horizon is 30 years?
A new project will have an intial cost of $10,000. Cash flows from the project are expected to be $3,000, $3,500, and $4,000 over the next 3 years, respectively. Assuming a discount rate of 8%, what is the project's Payback Period?
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?
The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%. One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8. Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
The development requires investments of $100,000 today, $300,000 in 1 year from today and $200,000 in 2 years from today. Net returns for the project are expected to be $90,000 at the end of year over the next 15 years. If the company requires a rate of return of 12% compounded annually-find the NPV of the project.
Jasmine Manufacturing is considering a project that will require an initial investment of $53,700 and is expected to generate future cash flows of $10,100 for years 1 through 3, $8,400 for years 4 and 5, and $2,200 for years 6 through 10. What is the payback period for this project? years

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