Suppose you are considering building a factory that produces turbo jets. Price of a turbo jet right now is $200. Next year the price could go up to $220 or go down to $180 or stay at $200 with equal probabilities. The price then remains fixed for a long time. (This assumption makes this cash flow risky). This will be your revenue. Cost of factory is $300 and it can be built right away since you have infrastructure in place. WACC is 30%. Cost of debt is 10%. You have the option to wait one year and see whether the price goes up or down and then invest only if price is above $180? What is the NPV? 414.22 167.52 312.82 566.67
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- An auto plant that costs $170 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $230 million if the line is successful but only $100 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant. a. Calculate the NPV. Suppose the plant can be sold for $150 million to another automaker if the auto line is not successful. b. Calculate the NPV.You are planning to produce a new action figure called "Nia." However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $66 million per year for three years (starting next year [i.e., at t = 1]). If it fails, you will only have net cash flows of $26 million per year for two years (also starting next year). There is an equal chance that it will be a hit or failure (probability = 50 percent). You will not know whether it is a hit or a failure until the first year's cash flows are in (i.e., at t = 1). You must spend $112 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $76 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10 percent.) Multiple Choice $23.80 −$7.37 $0.00 $16.43ou 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?
- Suppose that you are working on a product development venture and your best guess about the cost and revenue is as follows: you expect to spend $2 million on inventories and marketing in the near future (so you can treat all the expenses as immediate cash outlays) but you expect to receive $2.3 million of revenue in two years. Note that the # is an expected amount that is an average of the optimistic scenarios and pessimistic scenarios. This is also simplified to make the set-up easy. What is your expected return on this venture (in terms of a per year rate of return? In other words, what is the IRR?An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant. a-1.Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions.) a-2.Would you build the plant? Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful. b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.) b-2. Would you build the plant?A paving company is considering selling their lab faciltities and outsourcing their QC (Quality Control) testing. This external testing will cost them an average of $140k per year, but the will save $45k per year in labor costs. Selling their lab facilties will generate $1m. Assuming that this decision is permamenet, is this a good idea if their MARR is 8% per year. draw the cash flow diagram please.
- An auto plant that costs $140 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $200 million if the line is successful but only $60 million if it is unsuccessful. You believe that the probability of success is only about 40%. You will learn whether the line is successful immediately after building the plant. a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.) a-2. Would you build the plant? Suppose that the plant can be sold for $135 million to another automaker if the auto line is not successful. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answers in millions rounded to 1 decimal place.) b-1. Calculate the expected NPV. b-2. Would you build the plant?Two new software projects are proposed to a young, start-up company. The Delta project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Echo project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why? Present the payback period for each project. Use this formula: Payback period = Investment/Annual SavingsYou are considering an investment in a clothes distributer. The company needs $105,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17%. What does the IRR rule say about whether you should invest? What is the IRR of this investment oppurtunity? The IRR of this investment opppurtunity is ____%
- Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 million per year for 3 years. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. After discussions with the marketing department, you learn that there is a 30% chance of high demand with associated future cash flows of $45 million per year. There is also a 40% chance of average demand with cash flows of $30 million per year as well as a 30% chance of low demand with cash flows of only $15 million per year. What is the expected NPV?Two new software projects are proposed to a young, start-up company. The Alpha project will cost $1,150,000 to develop and is expected to have annual net cash flow of $140,000. The Beta project will cost $1,200,000 to develop and is expected to have annual net cash flow of $150,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?You run a construction firm. You have just won a contract to build a government office building. Building it will take one year and require an investment of $9.78 million today and $5 million in one year. The government will pay you $22.5 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 10%. What is the NPV of this opportunity?