UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 9CQ
Summary Introduction
To discuss: The advantages of the given statement.
Introduction:
The concept “option to wait” deals with a firm’s decision where the firm needs to decide on a particular task whether to wait or proceed immediately. An option can have more than one source of values.
Statement:
A logging company has two options; one is to log the timber at present or to wait for another year to log the timber.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Solve and show the solution.
Zandri Industries is evaluating whether to invest in solar
panels to provide some of the electrical needs of its main
office building in Buffalo, New York. The solar panel project
would cost $475,000 and would provide cost savings in its
utility bills of $45,000 per year. It is anticipated that the solar
panels would have a life of 15 years and would have no
residual value.
(Click the icon to view the present value factor table.)
(Click the icon to view the present value annuity factor
table.).
(Click the icon to view the future value factor table.)
(Click the icon to view the future value annuity factor
Read the requirements.
table.)
Requirement 1. Calculate the payback period in years of the solar panel project.
Determine the formula, then calcuste the payback period. (Round your answer to two decimal places.)
Initial investment
Expected annual net cash inflow
Payback period
%3D
%24
475,000
$4
45,000
10.56 years
Requirement 2. If the company uses a discount rate of 10%, what is the…
Payback Period and Simple Rate of Return Computations
A piece of labor-saving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follow:
Required:
1. What is the payback period for the equipment? If the company requires a payback period of four years or less, would the equipment be purchased?
2. What is the simple rate of return on the equipment? Use straight-line depredation based on the equipment’s useful life. Would the equipment be purchased if the company’s required rate of return is 14%?
Chapter 7 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Decision Trees Ang Electronics. Inc., has...Ch. 7 - Decision Trees The manager for a growing firm is...Ch. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Financial Break-Even Niko has purchased a brand...Ch. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Project Analysis You are considering a new product...Ch. 7 - Project Analysis McGilla Golf has decided to sell...Ch. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Option to Wait Hickock Mining is evaluating when...Ch. 7 - Abandonment Decisions Allied Products, Inc., is...Ch. 7 - Prob. 24QPCh. 7 - Scenario Analysis You are the financial analyst...Ch. 7 - Scenario Analysis Consider a project to supply...Ch. 7 - Sensitivity Analysis In Problem 26, suppose youre...Ch. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Financial Break-Even The Cornchopper Company is...
Knowledge Booster
Similar questions
- A firm requires a payback period of 2 years or less. According to the payback period rule, which of the following projects is acceptable to this firm? Year Project A Project B Project C 0 -$86 -$128 -$77 1 30 40 100 2 40 20 -50 3 50 10 4 60 130 a. If you use payback period as a decision rule, you would choose (No answer given) Project A Project B Project Carrow_forwardBO eBook The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company's president must determine whether to make the expansion a medium- or large- scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.20, and 0.60, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firm's planners developed the following profit forecasts for the medium- and large-scale expansion projects. Demand Low Medium High Medium-Scale Expansion Profit f(x) 0.20 X 50 150 200 0.20 0.60 Large-Scale Expansion Profit y f(y) 0.20 0.20 0.60 0 100 300 (a) Compute the expected value for the profit associated with the two expansion alternatives. Round your answers to whole numbers, if needed. EV Medium-Scale Large-Scale Which decision is preferred for the objective of…arrow_forwardThe Siler Construction Company is about to bid on a new industrial construction project. To formulate their bid, the company needs to estimate the time required for the project. Based on past experience, management expects that the project will require at least 24 months, and could take as long as 48 months if there are complications. The most likely scenario is that the project will require 30 months. a. Assume that the actual time for the project can be approximated using a triangular probability distribution. What is the probability that the project will take less than 30 months? b. What is the probability that the project will take between 28 and 32 months? c. To submit a competitive bid, the company believes that if the project takes more than 36 months, then the company will lose money on the project. Management does not want to bid on the project if there is greater than a 25% chance that they will lose money on this project. Should the company bid on this project?arrow_forward
- Suppose a firm is considering two mutually exclusive projects. One has alife of 6 years and the other a life of 10 years. Would the failure to employsome type of replacement chain analysis bias an NPV analysis against oneof the projects? Explain.arrow_forwardShonda & 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_forwardJust because a project's payback period is relatively long doesn't mean it is not profitable in the long run. Consider an investment in LED lights with a price tag of $236,000. The estimated annual savings in electricity and routine maintenance is $39,500 and the life of the LED lights is 18 years. Assume that the payback period of three years or less is desired by the investor. a. What is the simple payback period for the lights? b. What is the IRR of this investment? c. What do you conclude from Part (a) and Part (b)? a. The simple payback period is years. (Round to one decimal place.)arrow_forward
- Suppose a firm is considering two mutually exclusive projects. One project has a life of6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives.Might the failure to employ a replacement chain or EAA analysis bias the decision towardone of the projects? If so, which one and why?arrow_forwardAssume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. Cost Option A Option B Initial Investment 1,400,000 1,500,000 Year 1 35000 25000 Year 2 35000 25000 Year 3 35000 25000 Year 4 35000 25000 Year 5 25000 Required: Perform capital budgeting technique based on EquivalentAnnual Cost (EAC) to advise the Company Management which option should be chosen if therelevant discount rate is 9%?arrow_forwardJust because a project's payback period is relatively long doesn't mean it is not profitable in the long run. Consider an investment in LED lights with a price tag of $242,000. The estimated annual savings in electricity and routine maintenance is $39,300 and the life of the LED lights is 22 years. Assume that the payback period of three years or less is desired by the investor. a. What is the simple payback period for the lights? b. What is the IRR of this investment? c. What do you conclude from Part (a) and Part (b)? a. The simple payback period is b. The IRR of the investment is c. Select all that apply. years. (Round to one decimal place.) %. (Round to one decimal place.) A. The IRR will signal an acceptable (profitable) project if the MARR is less than the IRR. B. The value of indicates a poor project in terms of liquidity. C. The value of indicates the best project in terms of liquidity. D. The IRR will signal an acceptable (profitable) project if the MARR is higher than the…arrow_forward
- The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?arrow_forwardWhich option should xinhong choosearrow_forwardA process engineer is considering two options for a new product line. One of the options must be chosen. • To make a unit in-house, equipment costing $250,000 must be purchased. It will have a life of 4 years, annual operating costs of $80,000, and a salvage value of $95,000. Each unit will also cost $40 to manufacture. Buying the unit externally will cost $100 per unit. The company's MARR is 12% per year. . a. If the anticipated volume is 2000 units per year, what is the annual equivalent cost for making the item in-house? [Select] b. If the anticipated v [Select] $222,430 $142,430 [Select] $182,430 $202,430 $262,430 e engineer shouldarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College