Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 22, Problem 17PS
a.
Summary Introduction
To determine: The
a.
Expert Solution
Answer to Problem 17PS
The present value of payoffs is $16,875,000.
Explanation of Solution
Determine the present value of payoffs
Excel Spreadsheet:
Therefore, the present value of payoffs is $16,875,000.
b.
Summary Introduction
To determine: The abandonment value.
b.
Expert Solution
Answer to Problem 17PS
The abandonment value is $1,936,448.60.
Explanation of Solution
Determine the gain value
The gain value is calculated if the demand is buoyant.
Therefore the gain value is 33.33%.
Determine the loss value
The loss value is calculated if the demand is sluggish.
Therefore, the loss value is -11.11%.
Determine p
The value of put can be calculate using the risk neutral method, were p is identical to the probability of increase in the asset value.
Therefore p is 0.408.
Determine the abandonment value:
If the demand is sluggish the payoffs will be $0 and if the demand is buoyant the payoffs is $3,500,000.
Therefore, the abandonment value is $1,936,448.60.
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You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for manufacturing high-pressure
hydraulic hoses. The parameters associated with each alternative have been estimated. Which one should be selected on the
basis of a present worth comparison at an interest rate of 10% per year? Why is yours the correct choice?
Alternative
First Cost
Maintenance cost, per
Year
Salvage Value
Life
X
$-25,000
$-8000
$1,000
5 years
Y
$-55,000
$-2000
$2,000
5 years
and that of alternative Y is $1
The present worth of alternative X is $.
Alternativ (Click to select) is selected by the company.
Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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