You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 66% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $9.5 million and yield profits of $1.09 million per year that grow at one of three possible growth rates in perpetuity: 3.2%, 0.0%, and - 3.2%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12.1% per year. What is the present value of all future growth opportunities Big Industries will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.) What is the present value of all future growth opportunities? The present value is $ million. (Round to three decimal places.)
You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 66% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $9.5 million and yield profits of $1.09 million per year that grow at one of three possible growth rates in perpetuity: 3.2%, 0.0%, and - 3.2%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12.1% per year. What is the present value of all future growth opportunities Big Industries will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.) What is the present value of all future growth opportunities? The present value is $ million. (Round to three decimal places.)
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
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Transcribed Image Text:You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has
consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 66% chance that a project will be
produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $9.5 million and yield profits of $1.09 million per year that grow at one of three
possible growth rates in perpetuity: 3.2%, 0.0%, and - 3.2%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are
not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12.1% per year. What the present value of all future growth opportunities Big Industries
will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.)
What is the present value of all future growth opportunities?
The present value is $ million. (Round to three decimal places.)
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