9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. $4,506 d. $3,755 e $3.379

9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. $4,506 d. $3,755 e $3.379

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 3MC: Tropical Sweets is considering a project that will cost $70 million and will generate expected cash...

See similar textbooks

Similar questions

Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 million per year for 3 years. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. After discussions with the marketing department, you learn that there is a 30% chance of high demand with associated future cash flows of $45 million per year. There is also a 40% chance of average demand with cash flows of $30 million per year as well as a 30% chance of low demand with cash flows of only $15 million per year. What is the expected NPV?
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?
Chrustuba Inc. is evaluating a new project that would cost $8.2 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6.2 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 10.0%, what is the project's expected NPV (in thousands) after taking this growth option into account?
WorldTrans is evaluating a new project that would cost $8.2 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6.2 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. Group of answer choices $5,720 $3,661 $4,576 $5,492 $5,034
9. Chrustuba Inc. is evaluating a new project that would cost $8.0 million at t= 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.4 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only S1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of Ss10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 8.5%, what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations. a. $3,942 b. $4,318 c. $4,506 d. S3,755 e. $3,379 10. Games Unlimited Inc. is considering a new game that would require an investment of $21.0 million. If the new game is well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the…
CT Inc. is evaluating a project that would cost P8 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of P6 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only P1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of P10 million at the end of Year 2, and this new investment could be sold for P20 million at the end of Year 3. However, if the project is unsuccessful, the new P10 million investment at the end of Year 2 would only be sold for P5,000,000 at the end of Year 3. Assume a WACC of 12.0%. Listed below are the requirements for this data set: What is the project's expected NPV if the company would not take the growth option? (Round final answer to the nearest peso) What is the project's expected NPV after taking into account this growth option? (Round final answer to the…
Singh Development Co. is deciding whether to proceed with Project X.The cost would be $11 million in Year 0. There is a 50% chance that X would be hugelysuccessful and would generate annual after-tax cash flows of $7 million per year duringYears 1, 2, and 3. However, there is a 50% chance that X would be less successful and wouldgenerate only $1 million per year for the 3 years. If Project X is hugely successful, it wouldopen the door to another investment, Project Y, which would require an outlay of $8 millionat the end of Year 2. Project Y would then be sold to another company at a price of$16 million at the end of Year 3. Singh’s WACC is 9%.a. If the company does not consider real options, what is Project X’s expected NPV?b. What is X’s expected NPV with the growth option?c. What is the value of the growth option?
| Frontier Corp. is considering a new product that would require an after-tax investment of $1,400,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be good. Tsai Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $108,226.89 b. $137,743.32 c. $167,259.75 d. $196,776.18 e. $216,453.79
JBL Inc. is considering a new product that would require an after-tax investment of $1,400,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $ 650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be good. JBL Inc. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $108, 226.89 b. $ 137, 743.32 c. $167, 259.75 d. $196, 776.18 e. $216, 453.79
Feldman Corp. is considering a new product that would require an investment of $8 million at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $3.4 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $1.85 million per year. There is a 65% probability that the market will be good. Foltz Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows—only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $144,867.15 b. $269,039.00 c. $357,188.00 d. $413,906.15 e. $455,296.77