J&R Construction Company is an international conglomerate with a real estate divisionthat owns the right to erect an office building on a parcel of land in downtownSacramento over the next year. This building would cost $61 million to construct. Due tolow demand for office space in the downtown area, such a building is worthapproximately $59 million today. If demand increases, the building would be worth $63.4million a year from today. If demand decreases, the same office building would be worthonly $57 million in a year. The company can borrow and lend at the risk-free annualeffective rate of 2 percent. A local competitor in the real estate business has recentlyoffered $760,000 for the right to build an office building on the land. What is the value ofthe office building today? Use the two-state model to value the real option. (Do notround intermediate calculations and enter your answer in dollars, not millions ofdollars, rounded to 2 decimal places, e.g., 1,234,567.89.)Building value

To value the real option, we can use a two-state model, where the building will either be…

Answered: J&R Construction Company is an…

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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J&R constructions company owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $37.8 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $36 million today. If demand increases, the building would be worth $39.4 million a year from today. If demand decreases, the same office building would be worth only $35 million in a year. The company can borrow and lend at the risk-free annual effective rate of 7 percent. A local competitor in the real estate business has offered J&R Construction Company $X for the right to build an office building on the land. Use the binomial model to find the value of X that would leave J&R Construction Company indifferent to accepting or rejecting the offer. Assume risk-neutrality
Champion Chemical Corporation is planning to expand one of its propylene manufacturing facilities. At n = 0, a piece of property costing $1.5 million must be purchased for the expanded plant site. The building, which needs to be expanded at the beginning of the first year, costs $3 million. At the end of the first year, the company needs to spend about $4 million on equipment and other start-up needs. Once the plant becomes operational, it will generate revenue in the amount of $3.5 million during the first operating year. This amount will increase at an annual rate of 5% over the previous year's revenue for the next nine years. After l 0 years. the sales revenue will stay constant for another 3 years before the operation is phased out. (The plant will have a project life of 13 years after construction.) The expected salvage value of the land would be about $2 million, the building about $1.4 million, and the equipment about $500,000. The annual operating and maintenance costs are…
Richard XYZ Company., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $7.7 million aftertax if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $29.3 million to build, and the site requires $1.41 million worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?Thank you for your help very appreciated.
Y7 J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $32 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $31 million today. If demand increases, the building would be worth $33.2 million a year from today. If demand decreases, the same office building would be worth only $29.5 million in a year. The company can borrow and lend at the risk-free annual effective rate of 6.5 percent. A local competitor in the real estate business has recently offered $768,000 for the right to build an office building on the land. What is the value of the office building today? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $8.7 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $11.5 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $22.7 million to build, and the site requires $1,020,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Cash flow: $_______
Cameron Enterprises, Inc. is considering launching a new corporate project. The company will have to make Capital Investments, Working Capital investments, andgenerate Cash Flows from Operating the new project. The Equipment required for theproject will cost $3,000,000 today, will last for three years (the length of the project),and is estimated at the time of purchase to sell for $300,000 at the end of its life. Revenue is projected at $5.0M in the first year, $5.3M in the second year, $5.6M in the third year, $5.9 in the fourth year, $6.0M in the fifth year, and $5.0M in the final year. The investment in Net Working Capital is $300,000 initially, with the year-end values at 10% of that year's sales. The company uses Straight-Line depreciation and has a Tax Rate of 27%. The appropriate discount rate for the risks involved is 10%. Per your DCF analysis of the project, what is the cash flow from the change in net working capital in year six? Multiple Choice None of the…
TaiGueLe Enterprises, Inc. is considering launching a new corporate project. The company will have to make Capital Investments, Invest in Changes in Net Working Capital, and generate Cash Flows from Operating the new project. The Equipment required for the project will cost $9,000,000 today, will last for six years (the length of the project), and is estimated at the time of purchase to sell for $600,000 at the end of its life. The company uses Straight-Line depreciation and has a Tax Rate of 20%. The appropriate discount rate for the risks involved is 12%. (Here is the picture attached) In year 6, the firm sells the capital equipment in line with their projection for $600,000. What is the firm's operating cash flow in year 3 ? Multiple Choice $1,209,600 none of the above $2,409,600 $3,819,200 $2,912,000
Disposable Containers Corp. (DCC) is considering a large plant expansion/modernization which will cost $98 million initially and another $62 million at the end of year 3. This project is expected to produce incremental after-tax profits of $29 million, $32 million, $26 million, $42 million, $40 million and $31 million to be received at the end of years 1, 2, 3, 4, 5 and 6 respectively. If the WACC is 9%, what is the project’s NPV? (Start by drawing a timeline.)
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $7.7 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $29.3 million to build, and the site requires $1.41 million worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Tannen Industries is considering an expansion. The necessaryequipment would be purchased for $18 million, and the expansion would require an additional$2 million investment in net operating working capital. The tax rate is 40%.a. What is the initial investment outlay?b. The company spent and expensed $20,000 on research related to the project last year.Would this change your answer? Explain.c. The company plans to use a building that it owns to house the project. The buildingcould be sold for $1 million after taxes and real estate commissions. How would thatfact affect your answer?
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%. a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ Calculate each project's IRR. Round your answers to two decimal places. Project A: Project B: b. Set up a Project A by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. Round your answers to the nearest dollar. Use a minus sign to enter cash outflows, if any. Project A Cash Flows $ Year $ ܂ 1-20 % What is the NPV for this…
BASF North America is considering a new six-year expansion project to its facility in Wyandotte, Michigan that requires capital expenditures of $3 million today. The fixed asset will have a depreciation expense of $500,000 this year. There is no changes in net working capital that are anticipated. The project is estimated to generate $1,987,000 in annual sales, with operating costs of $1,102,200. If the tax rate is 21 percent, the free cash flow of the project is closest to which number? -$2.301 Million -$2.196 Million $3.803 Million O-$1.696 Million

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