High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-5o chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. O a. $314 O b. $964 O C. $126 O d. $503 O e. $189

High Roller Properties is considering building a new casino at an after-tax cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-5o chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.00 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. O a. $314 O b. $964 O C. $126 O d. $503 O e. $189

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P: The Rodriguez Company is considering an average-risk investment in a mineral water spring project...

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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?
High Roller Properties is considering building a new casino at a cost of P10 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be P1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be P3.75 million per year for the next 5 years. The project's WACC is 11.0%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net P6.5 million after tax at t = 1. What is the value (in thousands) of this abandonment option? O P308 O P249 P224 P277
High Roller Properties is considering building a new casino at an after-tax cost of $9.5 million at t = o. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 11.8%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $6.30 million after taxes at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $689 b. $949 c. $1,638 Od. $1,098 e. $260
WorldTrans is considering building a new casino at a cost of $10.0 million at t = 0. The after-tax cash flows the casino generates will depend on whether the state imposes a new income tax, and there is a 50-50 chance the tax will pass. If it passes, after-tax cash flows will be $1.875 million per year for the next 5 years. If it doesn't pass, the after-tax cash flows will be $3.75 million per year for the next 5 years. The project's WACC is 10.6%. If the tax is passed, the firm will have the option to abandon the project 1 year from now, in which case the property could be sold to net $5.9 million after tax at t = 1. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. Group of answer choices $15 $18 $12 $11 $13
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
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Utah Enterprises is considering buying a vacant lot that sells for $1.1 million. If the property is purchased, the company's plan is to spend another $5 million today (t = 0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative session. If the tax is imposed, the hotel is expected to produce after-tax cash inflows of $550,000 at the end of each of the next 15 years, versus $1,100,000 if the tax is not imposed. The project has a 13% cost of capital. Assume at the outset that the company does not have the option to delay the project. Use decision-tree analysis to answer the following questions. What is the project's expected NPV if the tax is imposed? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places. Negative value, if any,…
3.High Roller Properties is considering building a new casino at a costof $10 million at t = 0. The after-tax cash flows the casino generateswill depend on whether the state imposes a new income tax, and there isa 50-50 chance the tax will pass.If it passes, after-tax cash flowswill be $1.875 million per year for the next 5 years.If it doesn'tpass, the after-tax cash flows will be $3.75 million per year for thenext 5 years.The project's WACC is 11.0%.If the tax is passed, thefirm will have the option to abandon the project 1 year from now, inwhich case the property could be sold to net $6.5 million after tax att = 1.What is the value (in thousands) of this abandonment option?a. $202b. $224c. $249d. $277e.$308(Dollars in thousands)WACC11.0%Investment cost$10,000CFs, no tax$3,750CFs, with tax$1,875
XYZ is considering buying a new, high efficiency interception system. The new system would be purchased today for $47,700.00. It would be depreciated straight-line to SO over 2 years. In 2 years, the system would be sold for an after-tax cash flow of $14,600.00. Without the system, costs are expected to be $100,000.00 in 1 year and $100,000.00 in 2 years. With the system, costs are expected to be $79,000.00 in 1 year and $69,700.00 in 2 years. If the tax rate is 46.50% and the cost of capital is 8.40%, what is the net present value of the new interception system project? a. $11893.11 (plus or minus $50) b. $12724.27 (plus or minus $50) c. $8553.76 (plus or minus $50) d. $9953.14 (plus or minus $50) e. None of the above is within $50 of the correct answer
Hoodin Inc. has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a similar initial outlay and have a useful life of 8 years However, one of the machines will generate $20,000 annually in positive after tax cash flows and would have an after tax residual value of $20,000. The other option will generate $15,000 annually in positive after tax cash flows and would have an after tax residual value of $11,000. Using a discount rate of 9%, which option is the most attractive
The corner shop is considering a new four year expansion project that requires an initial fixed asset investment of 210000. The fixed asset will be depreciated straight line to zero over its four year life, after which time it will be worthless. The project is estimated to generate 48000 in annual sales, with costs of 31000. If the tax rate is 21 percent, what is the ocf for this project? .
Carlson Inc. is evaluating a project in India that would require a $6.0 million after-tax investment today (t = 0). The after-tax cash flows would depend on whether India imposes a new property tax. There is a 50-50 chance that the tax will pass, in which case the project will produce after-tax cash flows of $1,100,000 at the end of each of the next 5 years. If the tax doesn't pass, the after-tax cash flows will be $2,100,000 for 5 years. The project has a WACC of 10.2%. The firm would have the option to abandon the project 1 year from now, and if it is abandoned, the firm would receive the expected $1.10 million cash flow at t = 1 and would also sell the property and receive $4.95 million after taxes at t = 1. If the project is abandoned, the company would receive no further cash inflows from it. What is the value (in thousands) of this abandonment option? Do not round intermediate calculations. a. $1,124 b. $739 c. $705 d. $671 e. $34