Foundations of Finance, Student Value Edition Plus MyLab Finance with Pearson eText - Access Card Package (9th Edition)
9th Edition
ISBN: 9780134426815
Author: Arthur J. Keown, John D. Martin, J. William Petty
Publisher: PEARSON
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Chapter 11, Problem 17SP
(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $6 million. You also estimate that there is a 50 percent chance that this new restaurant will be well received and will produce annual cash flows of $800,000 per year forever (a perpetuity), while there is a 50 percent chance of it producing a cash flow of only $200,000 per year forever (a perpetuity) if it isn’t received well.
- a. What is the
NPV of the restaurant if the requiredrate of return you use to discount the project cash flows is 10 percent? - b. What are the real options that this analysis may be ignoring?
- c. Explain why the project may be worthwhile, even though you have just estimated that its NPV is negative.
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Chapter 11 Solutions
Foundations of Finance, Student Value Edition Plus MyLab Finance with Pearson eText - Access Card Package (9th Edition)
Ch. 11.A - Depreciation, while an expense, is not a cash flow...Ch. 11.A - Depreciation, while an expense, is not a cash flow...Ch. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - If a project requires an additional investment in...Ch. 11 - Prob. 4RQCh. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - (Relevant cash flows) Captins Cereal is...Ch. 11 - (Calculating operating cash flows) Assume that a...
Ch. 11 - Prob. 8SPCh. 11 - Prob. 9SPCh. 11 - Prob. 10SPCh. 11 - Prob. 11SPCh. 11 - (Calculating free cash floras) Vandelay Industries...Ch. 11 - Prob. 13SPCh. 11 - Prob. 14SPCh. 11 - Prob. 15SPCh. 11 - Prob. 16SPCh. 11 - (Real options and capital budgeting) You have come...Ch. 11 - (Real options and capital budgeting) Go-Power...Ch. 11 - (Real options and capital budgeting) McDoogals...Ch. 11 - (Risk-adjusted NPV) The Hokie Corporation is...Ch. 11 - (Risk-adjusted discount rates and risk classes)...Ch. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MC
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