Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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 2PS
Summary Introduction

To discuss: The appropriate option according to the given statement.

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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 ?
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