INTERMEDIATE FINANCIAL MANAGEMENT
12th Edition
ISBN: 9781305718265
Author: Brigham
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Chapter 14, Problem 4MC
Summary Introduction
Case summary:
For suppose, Person X has been hired as a financial analyst by Company T that specializes in creating candies from tropical fruits such as papayas, mangoes and dates. Company’s CEO Person Y recently returned from an industry and attended one of the sessions on real options.
He asked the company executives to prepare a report that could use to gain at least a cursory understanding of the topics.
To discuss: A qualitative assessment of the investment timing option’s value.
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Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with
inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations
and round the final answer to the nearest whole number.
WACC or cost of capital
Net investment cost (depreciable basis)
The salvage value of its equipment
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The company will require an increase in net working capital at the
$10,000
beginning
The company will liquidate all working capital at the end of the project -10,000
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60,000
$30.00
$50,000
$17.00
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What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's weighted average cost of capital (WACC) is 9%, the project's NPV (rounded to the nearest dollar) is: $355,048 $287,420 $405,769 $338,141 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account.
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should
increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated
on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for
the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV?
10.0%
$200,000
39,000
$25.00
WACC
Net investment cost (depreciable basis)
Units sold
Average price per unit, Year 1
Fixed op. costs excl. depr. (constant)
Variable op. cost/unit, Year 1
Annual depreciation rate
Expected inflation rate per year
Tax rate
Oa. -$64.886
Ob. -$66,833
Oc. -$72,673
O d. -$73,970
O e. -$60,993
$150,000
$20.20
33.333%
5.00%
40.0%
Chapter 14 Solutions
INTERMEDIATE FINANCIAL MANAGEMENT
Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Prob. 3QCh. 14 - If a company has an option to abandon a project,...Ch. 14 - Prob. 3PCh. 14 - Investment Timing Option: Option Analysis
Rework...Ch. 14 - Prob. 7PCh. 14 - Prob. 1MCCh. 14 - What are five possible procedures for analyzing a...Ch. 14 - Tropical Sweets is considering a project that will...
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