Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise withinflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculationsand round the final answer to the nearest whole number.WACC or cost of capitalNet investment cost (depreciable basis)The salvage value of its equipmentNo other fixed assets will be acquired for following yearsThe company will require an increase in net working capital at the$10,000beginningThe company will liquidate all working capital at the end of the project -10,000Units sold (constant through years)60,000$30.00$50,000$17.00Average price per unit, Year 1Fixed operating cost, exclude depreciation (constant through years)Variable operating cost per unit, Year 1Variable operating cost and average price per unit increase every year atinflation rateMARCS 3-year depreciation rate:Depreciation rate for year 1Depreciation rate for year 2Depreciation rate for year 3Depreciation rate for year 4Expected inflation rate per yearTax rateO 575.890Ⓒ 959,404O 651,736O 356,98515.00%$250,000$20,00033.33%44.45%14.81%7.41%5.00%35.00%

Net present value is determined by deducting the initial investment from the current value of cash…

Answered: s. What is the project's expected NPV?…

Business

Finance

s. What is the project's expected NPV? D

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 12P

See similar textbooks

Similar questions

Waste Management Inc. is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price will increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years, and there will be no salvage value. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? IRR? Would you accept this project? WACC 9.50% Net investment cost (depreciable basis) $100,000 Units sold 40,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. depr'n (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.33% Expected inflation 5.00% Tax rate 40.0% Please show work.
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? 10.0% $200,000 39,000 $25.00 WACC Net investment cost (depreciable basis) Units sold Average price per unit, Year 1 Fixed op. costs excl. depr. (constant) Variable op. cost/unit, Year 1 Annual depreciation rate Expected inflation rate per year Tax rate Oa. -$64.886 Ob. -$66,833 Oc. -$72,673 O d. -$73,970 O e. -$60,993 $150,000 $20.20 33.333% 5.00% 40.0%
Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?
1. Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Net investment cost (depreciable basis) Units sold $200,000 40,000 $25.00 Average price per unit, Year 1 Fixed op. cost excl. depr. (constant) Variable op. cost/unit, Year 1 Annual depreciation rate Expected inflation rate per year Tax rate $150,000 $20.20 33.333% 5.00%…
ou are considering setting up a firm to produce widgets. The cost of the project is $30 today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high, cash flows in t = 1 are $66 and when the demand is low, cash flows in t = 1 are $34. The discount rate is 10%. What is the NPV of the project? Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?
Currently under consideration is a project with a beta, b of 1.50. At this time, the risk free rate of return, Rf is 7%, and the return on the market portfolio of assets, Rm is 10%. The project is actually expected to earn an annual rate of return 11%. a. Calculate the required rate of return using the capital asset pricing model (CAPM). b. Assume that the market return drops by 1%, what would be the required rate of return?
Project A requires an investment of 1 million today and pays out 5 million in expectation next years. Project B requires an investment of $10 million today and pays out $ 20 million in expectation next year. Project B has high idiosyncratic risk and no systematic risk, while Project A is risk free. The two projects are mutually exclusive. Assume the risk free rate is if >0%, Given these assumptions. Project A has a higher NPV than Project B.
Zuti has a capital investment project that could start immediately. The project will require a machine costing $2.4 million. The total discounted value now of the cash inflows from the project will be either $2.6 million or $1.9 million with equal probability. The risk-free rate is 3%. Instead of starting immediately the project could be delayed until one year from now to gain more market information. Its total discounted cash inflows at that time will be known as either $2.6 million, or $1.9 million, with certainty. (i) What is the present value of the option to delay? (ii) The supplier of the machine has offered to deliver it (if required) in one year's time at a price of only $2 million, if Zuti pays a non-refundable deposit now. What is the maximum the firm should pay as a deposit now? What type of real option does this represent for Zuti? Identify the specific components of the option contract.
What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's weighted average cost of capital (WACC) is 9%, the project's NPV (rounded to the nearest dollar) is: $355,048 $287,420 $405,769 $338,141 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account.
OmegaTech is considering project A. The project would require an initial investment of $52,100.00, and then have an expected cash flow of $77,900.00 in 4 years. Project A has an internal rate of return of 9.31 percent. The weighted-average cost of capital for OmegaTech is 6.99 percent. The risk of the project is similar to the average risk of the company. Which one of the following assertions is true? The NPV that Omega Tech would compute for project A is less than or equal to -$11.16. The NPV that Omega Tech would compute for project A can not be computed from the information provided The NPV that Omega Tech would compute for project A is equal to greater than $0.00. The NPV that OmegaTech would compute for project A is greater than -$11.16 but less than $0.00.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A project has two possible outcomes. The good outcome returns $8,000 next year and occurs 88% of the time. The bad outcome is total failure, returning $0, the rest of the time. If the risk free interest rate is 4.8%, the expected market return is 10.4%, and the project beta is 1.1, what is the price of the project today?