a) You are the CEO of a highly profitable firm and you expect the firm to remainsuccessful and profitable in the future. Currently, you are evaluating a new,large investment project that could be initiated at the start of 2022. The projectinvolves the purchase of a real estate asset requiring an initial outlay of £650million. You expect that, over the first five years of the project, its initial capitalinvestment should be fully depreciated. Your accountants have prepared thefollowing projections on expected sales and cash flows (in millions), andinformation on the cost of capital of your company:Table 1. Sales and cash flow projections20222023202420252026SalesEBITD8011515514014313672104130122(130)(58)(10.44)(47.56)(130)(8)(1.44)(6.56)DepreciationEBIT(130)10(130)(26)(4.68)(21.32)(130)Тах еxpensеEBIAT1.88.2Table 2. Cost of capitalRisk-free Rate (Rf)Project Cost of Debt (Rd)Market Risk Premium1%4%6%Statutory and Marginal Corporate Tax 18%Rate (Tc)AssetBetaofComparable 0.8CompaniesAddress the following questions, always assuming that cash flows occur at theend of their respective years:(i) Estimate the NPV of the investment project at the start of 2022, if it is100% financed with equity and assuming that the project is terminated atthe end of 2026. Describe your calculations and comment on yourfindings.(ii) Use the WACC method to estimate the NPV of the investment at thestart of 2022, assuming that it is financed 25% with equity and 75% withdebt and that the project is terminated at the end of 2026. Describe yourcalculations and comment on your findings.

Net present value is the capital budgeting technique which helps the organisations in taking the…

(i) Estimate the NPV of the investment project at the start of 2022, if it is 100% financed with equity and assuming that the project is terminated at the end of 2026. Describe your calculations and comment on your findings. (ii) Use the WACC method to estimate the NPV of the investment at the start of 2022, assuming that it is financed 25% with equity and 75% with debt and that the project is terminated at the end of 2026. Describe your calculations and comment on your findings.

(i) Estimate the NPV of the investment project at the start of 2022, if it is 100% financed with equity and assuming that the project is terminated at the end of 2026. Describe your calculations and comment on your findings. (ii) Use the WACC method to estimate the NPV of the investment at the start of 2022, assuming that it is financed 25% with equity and 75% with debt and that the project is terminated at the end of 2026. Describe your calculations and comment on your findings.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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a) Suppose you are the CEO of a company and are considering investing in a new project that has an expected cash flow of $200,000 in year 1, $300,000 in year 2, and $500,000 in year 3. The initial investment required for the project is $800,000. You have a required rate of return of 12% for this project, but you are not sure if it is a good investment. What would you recommend? b) After further careful evaluation, you ascertain that the required rate of return for a similar industry project is 10%. Re-evaluate the investment opportunity using the new required rate of return. Does your recommendation change?
a) You are the CEO of a highly profitable firm and you expect the firm to remain successful and profitable in the future. Currently, you are evaluating a new, large investment project that could be initiated at the start of 2022. The project involves the purchase of a real estate asset requiring an initial outlay of £650 million. You expect that, over the first five years of the project, its initial capital investment should be fully depreciated. Your accountants have prepared the following projections on expected sales and cash flows (in millions), and information on the cost of capital of your company: Table 1. Sales and cash flow projections 2022 2023 2024 2025 2026 Sales 80 115 104 155 140 143 136 EBITD 72 130 122 (130) (58) (10.44) (47.56) (130) (26) (4.68) (21.32) Depreciation ЕBIT (130) 10 (130) (130) (8) (1.44) (6.56) Тах еxpensе 1.8 ΕΒΙΑΤ 8.2 Table 2. Cost of capital Risk-free Rate (Rf) Project Cost of Debt (Rd) Market Risk Premium 1% 4% 6% Statutory and Marginal Corporate Tax…
a) You are the CEO of a highly profitable firm and you expect the firm to remain successful and profitable in the future. Currently, you are evaluating a new, large investment project that could be initiated at the start of 2022. The project involves the purchase of a real estate asset requiring an initial outlay of £650 million. You expect that, over the first five years of the project, its initial capital investment should be fully depreciated. Your accountants have prepared the following projections on expected sales and cash flows (in millions), and information on the cost of capital of your company: Table 1. Sales and cash flow projections 2025 143 130 (130) 2022 80 72 2023 2024 2026 Sales 115 155 140 136 122 (130) (8) (1.44) (6.56) EBITD 104 (130) (26) (4.68) (21.32) Depreciation EBİT (130) (58) (10.44) (47.56) (130) 10 1.8 8.2 Tax expense ЕBIAT Risk-free Rate (Rf) Project Cost of Debt (Rd) Market Risk Premium Statutory and Marginal Corporate Tax 18% Rate (Tc) Table 2. Cost of…
You are the operations manager at a large firm looking to make a capital investment in a futureproject. Your company is considering two project investments. Project A’s payback period is 3years, and Project B’s payback period is 5.5 years.Your company requires a payback period of no more than 5 years on such projects.a. Which project should they further consider? Why?b. Is there an argument that can be made to advance either project or neither project? Why?c. What other factors might be necessary to make that decision?
A firm is considering a new project that requires an investment of $750,000. The firm plans to raise $250,000 through crowd funding and finance the remaining $500,000 through a private equity investment with a required rate of return of 15%. The project is expected to generate cash flows of $150,000 per year for the next 8 years. Required: What is the internal rate of return (IRR) of the project? Should the firm take this project?
Advance Inc. is considering investing £10 million on a project. It is expected that the project willgenerate annual cash inflows of 1.5 million in perpetuity. The corporate’s opportunity cost of capitalfor this project is 12%.a) Demonstrate the net present value (NPV) approach to evaluate whether to invest in thisproject.b) Demonstrate the internal rate of return (IRR) approach to evaluate whether to invest in thisproject.c) Which approach should be adopted when NPV and IRR generates conflicting results, andwhy?
Your company is about to undertake a major investment project. The project will require an initial outlay of $150 million for capital expenditure plus another $20 million for working capital. You expect that the after-tax free cash flows for the project will be $20 million, $30 million, and $35 million for year 1, 2, and 3. After Year 3, the new project is expected to have reached its market potential, so the free cash flows are expected to grow at the rate of 2% per year indefinitely into the future. The cost of capital is 20%. What is the project’s NPV? a. – $16.6 million b. $4.4 million c. – $12.4 million d. $26.7 million e. $2.5 million
(b) Nikita Berhad is evaluating a project which expected to earn a series of cash inflows as shown in the table below. The initial investment of this project is RM52,300. Cash Inflow (RM) 12,500 20,750 35,020 36,000 37,500 38,800 Year 2 3 4 5 6 If the required rate of return is 12 percent, determine whether this project is profit or loss by applying the net present value and profitability index techniques.
The company WHY is evaluating the possibility of building a warehouse (the project'). It implies an immediate investment cost (year zero) of €350 million. The discounted value (year zero) of expected cash flows is €275 million. However, WHY has the option to further invest €125 million within 1 year, which will enable it to triplicate the warehouse capacity, increasing by 60% the discounted value of cash flows. Assume the following: • Risk free interest rate: 2% per year. • The project gross value follows a multiplicative binomial process. • Method for the computation of remaining relevant inputs: compound annual growth. The market value of the shadow asset is given by S. Currently S = 18 and the estimation is that within 1 year S = 29 and S = 12 for the scenarios of favourable and unfavourable market evolution, respectively. In your answers to the next questions make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g b rather than B,…
As corporate manager for acquisitions, your group is assessing a project that is expected to produce cash flows of $750 at the end of year 1, $1,000 at the end of year 2, $850 at the end of year 3, and $2,000 at the end of Year 4. If the firm requires a minimum IRR or "hurdle rate" of 10% for these types of investments, what is most you should pay for this project? Your answer should be between 2738.00 and 4355.00, rounded to 2 decimal places, with no special characters.
Your firm has a risk-free investment opportunity with an initial investment of $162,000 today and receive $175,000 in one year. For what level of interest rates is this project attractive? The project will be attractive when the interest rate is any positive value less than or equal to _______% ?
1. A company is considering investing in a project. The future perpetual cash flow is either $750K if the market goes up or $125K if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is $1200K. а. Should the company invest in this project? b. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV of the cash flows. To expand the company will have to make an additional capital expenditure of $800K. The CFO wants to know if the company should now proceed with the project with the added flexibilities, and asks…

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