None Projects S and L are equally risky, mutually exclusive, and havenormal cash flows. Project S's IRR is 15%, while Project L's IRR is12%. The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?If the WACC for both projects is 10%, Project S will have a largerNPV than Project L.If the WACC for both projects is 18%, both projects will havepositive NPVs.If the WACC for both projects is 13%, Project L will have a largerNPV than Project S.If the WACC for both projects is 9%, both projects will havenegative NPVs.If the WACC for both projects is 6%, Project S will have a largerNPV than Project L18:21

When evaluating mutually exclusive projects, it's essential to consider the cost of capital (WACC)…

Answered: Projects S and L are equally risky,…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 45P: A project does not necessarily have a unique IRR. (Refer to the previous problem for more...

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A project does not necessarily have a unique IRR. (Refer to the previous problem for more information on IRR.) Show that a project with the following cash flows has two IRRs: year 1, 20; year 2, 82; year 3, 60; year 4, 2. (Note: It can be shown that if the cash flow of a project changes sign only once, the project is guaranteed to have a unique IRR.)
The cash flow details of a public project is as follows Initial cost =BD 210000 Annual operating cost = BD 10000 Worth of annual benefits = BD 12,000 Worth of annual disbenefits = BD 1245 Salvage value = BD 150000 Interest rate per year = 8% and useful lie = 30 Years Using benefit-cost ratio method and find out the economical acceptability of the public project. Use PW and AW methods to find out the equivalent worth of costs, benefits and disbenefits, also discuss why it is profitable(Use excel)
It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $1500. However, if you cannot ski because the helicopters cannot fly due to bad weather, there is no snow, or you get sick, you do not get a refund. There is a 25% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and you are well, the vacation will cost $4000. You estimate that the pleasure you get from heli-skiing is worth $6300 per week to you (if you had to pay any more than that, you would choose not to go). If your cost of capital is 12% per year, should you book ahead or wait and why? (A decision tree is needed in the answer)
Scenario Your corporation has just approved an 8-year expansion plan to grow its market share. The plan requires an influx of cash in each of the 8 years. Management wants to develop a financial plan to ensure the cash needed for the expansion will be available at the beginning of each of the 8 years. The corporation has the following investment options: Security Price per unit Return Rate (%) Years to Maturity 1 $1,200 10.255 5 2 $1,000 6.7550 6 3 $1,175 12.110 7 Savings Account 5.500 Each unit of security 1, 2, and 3 guarantees to pay $1,000 at maturity. Investments in these securities must take place only at the beginning of year 1 and will be held until maturity. Any funds not invested in securities will be invested in a savings account that pays the annual interest rates noted above. The following table summarizes the cash needs for the expansion plan for each of the 8 years: Year 1 = $250,000 Year 5 = $295,000…
An investor has patented a new device, and a bank is willing to lend the money to manufacture the device. Preliminary investigation establishes a suitable planning period of 5 years for the comparison of payoffs from this invention. According to the investor’s analysis, profit of $800,000 can be anticipated over the next 5 years if sales are strong; if sales are average, the investor can expect to make $200,000; and if sales are week, the investor expects to loss $50,000. Nationwide Enterprises, Inc. has offered to purchase the patent rights. Based on royalty arrangement, the inventor estimates that selling the patent rights may well bring a net profit of $400,000 if sales are strong, $70,000 if sales are average and $10,000 if sales are week. On the basis of extensive investigation of past experience with similar devices, the investor assigns the probabilities for strong, average, and week sales to be 0.2, 0.5, and 0.3 respectively. 1. Setup the payoff table for the inventor’s…
An investor has patented a new device, and a bank is willing to lend the money to manufacture the device. Preliminary investigation establishes a suitable planning period of 5 years for the comparison of payoffs from this invention. According to the investor’s analysis, profit of $800,000 can be anticipated over the next 5 years if sales are strong; if sales are average, the investor can expect to make $200,000; and if sales are week, the investor expects to loss $50,000. Nationwide Enterprises, Inc. has offered to purchase the patent rights. Based on royalty arrangement, the inventor estimates that selling the patent rights may well bring a net profit of $400,000 if sales are strong, $70,000 if sales are average and $10,000 if sales are week. On the basis of extensive investigation of past experience with similar devices, the investor assigns the probabilities for strong, average, and week sales to be 0.2, 0.5, and 0.3 respectively. 1. Setup the payoff table for the inventor’s…
company wants to issue a 15-year Bond with $1,000 face value and an 8% Annual coupon. the bond can be sold to investors for $1,010 per Bond but will incur transaction cost of $15 per Bond if the company tax rate is 21%. what is the after-tax cost of debt financing to the firm?
A store owner must decide whether to build a small or a large facility at a new location. Demand at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6, respectively. If small facility is built and demand proves to be high, the manager may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is P220,000. If a large facility is built and demand proves to be low, the choice is to do nothing (P60,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is P900,000.a.) Draw a decision tree.b.) Determine the expected payoff for each decision and event node.c.)…
5. Consider a 2-year CDS. Assume the conditional default probability is 9% in year 1 and 11% in year 2. Calculate the present value of the expected CDS payout per $1 of notional principal. Assume a 4% riskfree rate and 20% recovery given default.
The expected value of perfect information is the same as: maximin payoff. maximax payoff. the expected opportunity loss for the best alternative. the expected payoff. the expected payoff with perfect information.
c) Koki Nkoana is a writer of romance novels. A movie company and a TV network both want exclusive rights to one of her more popular works. If she signs with the network, she will receive a single lump sum, but if she signs with the movie company, the amount she will receive depends on the market response to her movie. Table 3 presents the payoff matrix (in '000) for Jenny Lind. Table 3: Profit matrix States of Nature Small Box Medium Box Large Box Decisions Office Office Office Sign with Movie Company R200 R1000 3000 Sign with TV Network R900 R900 R900 Prior Probabilities 0.3 0.6 0.1 Applying the decision tree algorithm, determine and advice Koki Nkoana on the best decision to make?
You are a corn producer. Today, May 1, you have planted corn and you expect a crop of over 1,500,000 bushels. You would like to sell the crop soon after the October harvest. You are fairly certain that prices are heading down, so you want to lock in a price for December delivery. The performance bond deposit of $1,000.00 per contract and possible performance bond calls will not cause you a cash-flow problem. You decide to sell three hundred December corn futures contracts (5,000 bushels each, or 1,500,000 bushels). The December futures price today is $5.6125 and the local forward cash for December is $5.2125. Brokerage fees for each contract is $25.00 round-turn. In December, futures prices have fallen to $5.6000 and cash prices to $5.2000. Date Cash Market Futures Market Basis May December Results In May do you take a long or short position in the futures market? In December, what do you do in the futures market?…

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