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
Question
Chapter 22, Problem 2PS
Summary Introduction
To discuss: The appropriate option according to the given statement.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Real Options—the Option to Abandon a Project You and several of your classmates havejust graduated from college and are evaluating various investment opportunities, including a startupcompany that would produce high-quality jackets embroidered with a college logo. If demand forthis customized product is high, you expect to sell approximately 100,000 units per year, at a priceper unit of $80. On the other hand, because of stiff competition in the field, a pessimistic estimateis that demand for your new product would be only 40,000 units per year at a selling price of$70. Anticipated variable costs per jacket amount to $40. Capacity-related (i.e., short-term fixed)costs other than the cost of manufacturing equipment are thought to be negligible. Manufacturingequipment (with a 10-year life, a cost of $12 million, and a zero salvage value) would have to bepurchased as part of this project. Assume that, for income tax purposes, your company will usestraight-line depreciation over the life…
If can't do all with explanation please skip iwill definitely like if you follow this or skip pls
You are considering purchasing a new database system for your company. The system will cost $80,000, and it will cost another $15,000 for equipment and training. The system is expected to be sold after three years, when you plan to outsource database activities. You hope that you can sell your system to a competitor for $12,000. You expect to save $22,000 per year in operating costs. Your corporate cost of capital is 10%.
What is the project’s net investment outlay at Year 0?
What are the projects’ 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? On what basis did you draw this conclusion? .
Use the following information to answer the question(s) below.
You have a small recycling business. A competitor has promised you to buy your business any time in the next 2 years
for the amount of CHF 370,000. (If you do not sell she will probably enter the market and crash you out)
On the other hand, you have some ideas for short term investments in your business that could yield to some interesting
revenue before you sell. These are your options.
Option 1: Sell the business right away.
Option 2: Invest CHF 36,000 now, generating $47,880 in profit next year and then sell the business at the end of next
year.
Option 3: Invest CHF 63,000 now, generating profits of CHF 50,400 at the end of both the first and second years, then
after 2 years, sell the business.
If the discount rate is 6.2%:
Format answers (#####.##)
i) What is the present value of option 1? 370000
ii) What is the present value of option 2 ?
iii) What is the present value of option 3 ?
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
- Shonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?arrow_forwardUse the information below to answer the following question: The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives: Sell the restaurant now and retire. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant. If the interest rate is 7%, compare the alternatives.arrow_forwardYou are a homeowner that has accepted a new job. The new job requires a commute that is undesirably long, but not impossible. You would like to sell your home and move into a new one nearer your job. Your discount rate for the funds received from the sale is 8% (annualized). Potential buyers will come, view and inspect the home, and negotiate a price offer. Your decision is to set (in your mind) the lowest such offer you are willing to accept. For simplicity, we will assume your decision must be an increment of 10K (i.e., 500K, 510K, 520K etc.) We will not go into the details of the negotiating process, and just assume that the eventual price offers come from a random process described below. 4. For-Sale-by-Owner. If you sell on your own, you will generate price offers that are uniformly distributed between [500K, 550K] USD, and will attract one offer every 2 months. However, as commission, the buyer’s agent will get 3% of the sale price (you will get the other 97%). a. To…arrow_forward
- Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?arrow_forwardGive typing answer with explanation and conclusionarrow_forwardWhen real estate agents sell their own, rather than clients', houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with better prices. Suppose that real estate agents earn a commission equal to 3% of the sale value of each house that they help sell. Suppose a real estate agent has an offer on a house of $300,000. The agent can get a 3% higher offer with more effort and by leaving the house on the market for a few more weeks. If the agent sells the house now, he will earn a commission of $___________? . By keeping the house on the market and expending more effort to sell the house, the agent can earn a commission of $__________? . Thus, the agent gains $______________? for the extra effort and time of keeping the house on the market. Suppose a real estate agent has an offer on a house that he owns. The agent has a current offer of $300,000, but can get a 3% higher offer with more effort and by leaving the house on the…arrow_forward
- Rerun the NPV analysis for Helen. Did she correctly determine a positive NPV related to her investment for this 8 year period? State the NPV amount. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardPlease answer all questionsarrow_forwardApo Don't upload any image pleasearrow_forward
- Question: . What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR criterion? Why? You have determined in your mind that you would like to have a business of your own, although your father runs a family restaurant in your local city. You have therefore, decided to have a medium size snack and cocktails bar which will accommodate the cruise ship passengers who visit your city. You plan to keep the business for five years after which you will sell it off to your brother John for $2,000,000 and go off to do your Master’s Degree in the UK. Though you will be occupying the establishment from your grandmother for free, you have decided that you need to make some improvements to the property which will cost you $1,500,000. Additionally, you will spend $275,000 in bar stools, tables and decorations. If this space had been leased out, it would have fetched a lease rental of $75,000 per year. You will depreciate the assets over 7…arrow_forwardQuestion: What is the project NPV? You have determined in your mind that you would like to have a businessof your own, although your father runs a family restaurant in yourlocal city. You have therefore, decided to have a medium size snackand cocktails bar which will accommodate the cruise ship passengerswho visit your city. You plan to keep the business for five yearsafter which you will sell it off to your brother John for $2,000,000and go off to do your Master’s Degree in the UK. Though you will beoccupying the establishment from your grandmother for free, you havedecided that you need to make some improvements to the property whichwill cost you $1,500,000. Additionally, you will spend $275,000 inbar stools, tables and decorations. If this space had been leased out,it would have fetched a lease rental of $75,000 per year. You willdepreciate the assets over 7 years using MACRS. You have determinedthat you would need an average cash balance of $15,000 and inventoryof $20,000 while…arrow_forwardThroughout the semester we have talked about the challenges facing office building owners in a post pandemic work environment where office workers are allowed to work remotely. You own a 500,00 square foot office building in a viable urban market, but you anticipate a stabilized vacancy rate of 40% for the next 10 years. If your investors require a 12% cash on cash return, how much could you spend per square foot to convert the vacant office space to micro-apartments if your project stabilized cash available to investors will be $12 million? Question 18 options: $200 per square foot. $800 per square foot. $250 per square foot. $500 per square foot.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Excel Applications for Accounting Principles
Accounting
ISBN:9781111581565
Author:Gaylord N. Smith
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
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Relevant Costing Explained; Author: Kaplan UK;https://www.youtube.com/watch?v=hnsh3hlJAkI;License: Standard Youtube License