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 67% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $10.3 million and yield profits of $1.07 million per year that grow at one of three possible growth rates in perpetuity: 3.3%, 0.0%, and - 3.3%. 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 11.9% 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 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 67% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $10.3 million and yield profits of $1.07 million per year that grow at one of three possible growth rates in perpetuity: 3.3%, 0.0%, and - 3.3%. 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 11.9% 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 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

Problem 1PS

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