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
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
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.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
2
What's the best way to solve this problem?
Solve and show the solution.
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 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.arrow_forwardPlease see image for question to solve for. Options for question B are; YesNoarrow_forward1.Should the proposed project be accepted based on the profitability index (PI)? Why or why not? ________ 5. Winslow, Inc. is considering opening a new plant to produce snow skis. The initial cost of the project is $1.8 million. This cost will be depreciated straight-line to a zero-book value over the 10-year life of the project. The net income of the project is expected to be a loss of $250,000 a year for the first four years. The net income is projected at $50,000, $230,000, $390,000, $480,000, $750,000, and $800,000 for years 5 through 10, respectively. What is the average accounting return on this project?arrow_forward
- 10.3 You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system’s price is $50,000, and it will cost another $10,000 for transportation and installation. The system is expected to be sold after three years because the laboratory is being moved at that time. The best estimate of the system’s salvage value after three years is $20,000. The system will have no impact on volume or reimbursement (and hence revenues), but it is expected to save $20,000 per year in operating costs. The not-for-profit business’s corporate cost of capital is 10 percent, and the standard risk adjustment is 4 percentage points. What is the project’s net investment outlay at time 0? What are the project’s operating cash flows in years 1, 2, and 3? What is the terminal cash flow at the end of year 3? If the project has average risk, is it expected to be profitable? What if the project is judged to have lower-than-average risk? Higher-than average risk?arrow_forwardA Company is considering two alternatives with regards to an equipment which it needs. The alternatives are as follows: Alternative A; Purchase Cost of equipment Salvage value Daily operating cost Economic life, years P700,000 100,000 500 10 Alternative B: Rental at P1,500 per day At 18% interest, how many days per year must the equipment be in use if Alternative A is to be chosen.arrow_forwardOption E) is incorrect . Please solve correctlyarrow_forward
- The management of Kunkel Company is considering the purchase of a $41,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?arrow_forwardThe management of Kunkel Company is considering the purchase of a $43,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?arrow_forwardA firm is considering three mutually exclusive alternatives as a part of an upgrade to an existing transportation network. If the MARR is 10% per year, which alternative(if any) should be chosen using the IRR analysis procedure? Use trial & error and show your calculations. A B C Initial Cost 40000 30000 20000 Annual Revenue 10400 8560 7750 Annual Cost 4000 3000 2500 Salvage Value 3000 2500 2000 Useful Life 20 20 10arrow_forward
- The management of Kunkel Company is considering the purchase of a $29,000 machine that would reduce operating costs by $6,500 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 16%. Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present valuearrow_forwardThe management of Kunkel Company is considering the purchase of a $23,000 machine that would reduce operating costs by $5,000 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 12%. Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present valuearrow_forwardThe management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $6,500 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 13%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License