In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the NPV of that investment using a 6% discount rate. How much value does the $3.2 billion investment create or destroy? Does it seem that J&J should be pursuing growth in this market?

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Answer 1

Textbook Question

Chapter 9, Problem 1OR

In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the NPV of that investment using a 6% discount rate. How much value does the $3.2 billion investment create or destroy? Does it seem that J&J should be pursuing growth in this market?

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

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Answer 2

Textbook Question

Chapter 9, Problem 1OR

In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the NPV of that investment using a 6% discount rate. How much value does the $3.2 billion investment create or destroy? Does it seem that J&J should be pursuing growth in this market?

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 9, Problem 1OR

In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the NPV of that investment using a 6% discount rate. How much value does the $3.2 billion investment create or destroy? Does it seem that J&J should be pursuing growth in this market?

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 9, Problem 1OR

In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the NPV of that investment using a 6% discount rate. How much value does the $3.2 billion investment create or destroy? Does it seem that J&J should be pursuing growth in this market?

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

Answer 8

Expert Solution & Answer

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To discuss:

To calculate the NPV.

Introduction:

The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.

Answer 12

Explanation of Solution

The NPV can be calculated as follows,

NPV1 year=Net cash flowDiscount rate=5440.06=9,066.67

Since the NPV value is positive the projects creates a value worth $9,066.67 million.

Answer 13

Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQ Ch. 9.1 - Prob. 9.3RQ Ch. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQ Ch. 9.2 - Prob. 9.6RQ Ch. 9.2 - Prob. 9.7RQ Ch. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...Ch. 9.4 - How do the constant-growth valuation model and...

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