You own an oil pipeline that will generate a $2.8 million cash return over the coming year. The pipeline's operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 5.5% per year. The discount rate is 12%. a. What is the PV of the pipeline's cash flows if its cash flows are assumed to last forever? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) Present value b. What is the PV of the cash flows if the pipeline is scrapped after 15 years? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) Present value

You own an oil pipeline that will generate a $2.8 million cash return over the coming year. The pipeline's operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 5.5% per year. The discount rate is 12%. a. What is the PV of the pipeline's cash flows if its cash flows are assumed to last forever? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) Present value b. What is the PV of the cash flows if the pipeline is scrapped after 15 years? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) Present value

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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You own an oil pipeline that will generate a $2.9 million cash return over the coming year. The pipeline’s operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 6.0% per year. The discount rate is 5%. a. What is the PV of the pipeline’s cash flows if its cash flows are assumed to last forever? b. What is the PV of the cash flows if the pipeline is scrapped after 16 years?
A project costing $100 will produce perpetual net cash flows that have an annual volatility of 35% with no expected growth. If the project existed, net cash flows today would be $8. The project beta is 0.5, the effective annual risk-free rate is 5%, and the effective annual risk premium on the market is 8%. What is the static NPV of the project? What would you pay to acquire the rights to this project if investment rights lasted only 3 years? What would you pay to acquire perpetual investment rights?
Salt Lake Potash is considering a project with the following cash flows. An initial investment of $1.025bn is required for the project. The discount rate is 9%. The company wants to calculate how long it would take investors to recover their initial investment. The company does not want to ignore the effects of time value of money and the discount rate. Year O CF ($mn) -$1,025 1.83 years 2.26 years What is your best estimate of the time to recovery? $159.79mn 1 2 $650 $450 19.9% 3 $250 4 $50
You own an oil pipeline that will generate a $2million cash return over the coming year. Thepipeline’s operating costs are negligible, and it isexpected to last for a very long time. Unfortunately,the volume of oil shipped is declining, and cashflows are expected to decline by 4% per year. Thediscount rate is 10%.a) Calculate the PV of the pipeline’s cash flows if itscash flows are assumed to last forever.b) Calculate the PV of the cash flows if the pipelineis scrapped after 20 years.
Krishna India owns an oil pipeline which will generate Rs. 12 crore of cash income in the coming year. It has a very long life with virtually negligible operating cost. The volumeof shipped, however, will decline over time and, hence, cash flows will decrease by 3% per year. The Discount rate is 12%. a. If the pipeline is used forever, what is the present value of its cash flows? b. If the pipeline is scraped after 25 years, what is the present value of its cashflows?
You currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows. Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate. (a) What is the NPV of this project? (b) Suppose you decide to finance this project with your own cash. How much money do you expect to have one year from now? (c) You have found investors who will fund the full cost of the project through equity. You will invest your cash at a risk-free rate. What is the share of equity they will ask for? How much money do you expect to have one year from now? (d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim…
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,950,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $45,000 per year. She estimates that the shop will have a useful life of 6 years. c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…
Growth Enterprises believes its latest project, which will cost $82,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%. a. If the discount rate for this project is 10%, what is the project NPV? (Do not round intermediate calculations.) NPV b. What is the project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR < Prev 2 of 8 Next search 長

Bluekettle Inc. is considering a project that has the following cash. What is the project's NPV(net present value) if you use a required rate of 14% ? If the NPV is negative, put the minus sign in front of your answer, such as -200.56. Note that a project's projected NPV can be negative, in which case it will be rejected. Year 0 1 2 3 Cash flows - $6,500 $1,600 $3,700 $7,500
A project has expected cash flows with a present value of $75 million. The annual standard deviation of the project's returns is 35%. The company can delay the start of the project by 1 year to find out more about the demand for the product. If the company decides to go ahead with the project after 1 year, the company needs to invest $50 million. The risk-free rate is 5% (continuously compounded). What is the value of the option to delay (in $ million)?
Growth Enterprises believes its latest project, which will cost $82,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%. a. If the discount rate for this project is 10%, what is the project NPV? Note: Do not round intermediate calculations. NPV b. What is the project IRR? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. IRR %
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 $80 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 $40 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 $140 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $90 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 $24.38 $18.56 -$5.82 $0.00

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