Foundations of Finance (9th Edition) (Pearson Series in Finance)
9th Edition
ISBN: 9780134083285
Author: Arthur J. Keown, John D. Martin, J. William Petty
Publisher: PEARSON
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Chapter 11, Problem 18SP
(Real options and capital budgeting) Go-Power Batteries has developed a high-voltage nickel–metal hydride battery that can be used to power a hybrid automobile. It can sell the technology immediately to Toyota for $10 million, or alternatively, Go-Power Batteries can invest $50 million in a plant and produce the batteries for itself and sell them. Unfortunately, given the current size of the market for hybrids, the
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(Real options and capital budgeting) Go-Power Batteries has developed a high-voltage nickel-metal
hydride battery that can be used to power a hybrid automobile and it can sell the technology immediately to
Toyota for $11.9 million. Alternatively, Go-Power Batteries can invest $51.6 million in a plant and produce
the batteries for itself and sell them. Unfortunately, the present value of the cash flows from such a plant
would only be $39.2 million, such that the plant has a negative expected NPV of - $12.4 million. The
problem, Go-Power executives recognize, is the small size of the market for a hybrid car today. Under
what assumptions might Go-Power Batteries decide not to sell the technology to Toyota and delay
investment in the new plant?
(Select all that apply.)
| A. As long as Go-Power Batteries had patent protection none of its competitors will develop a
superior technology that makes the hydride battery obsolete.
B. Even if Go-Power Batteries had patent protection a competitor…
An auto plant that costs $170 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $230 million if the line is successful but only $100 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
a. Calculate the NPV.
Suppose the plant can be sold for $150 million to another automaker if the auto line is not successful.
b. Calculate the NPV.
A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $248, the sales price would be set at
twice the VC/unit, and fixed costs are estimated at $357730. The investors will put up the funds if the project is likely to have an operating income of $406340 or more. What sales volume would be required in order to
meet the minimum profit goal? (Hint: Use the break-even formula, but include the required profit in the numerator.)
Note: Answers should be whole numbers (no decimals)
Answer:
Chapter 11 Solutions
Foundations of Finance (9th Edition) (Pearson Series in Finance)
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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