EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 11, Problem 18P
a)
Summary Introduction
To determine: Project’s
b)
Summary Introduction
To determine: Net present value of the project by using risk adjusted discount rate.
c)
Summary Introduction
To determine: Whether the project is accepted or not.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. the initial outlay would be $11,700,000, and the project would generate cash flows of $1,200,000 per year for 20 years. the appropriate discount rate is 6.7%.
A. Calculate the NPV
b. Calculate the PI
C. Calculate the IRR
D. should this project be accepted? why or why not?
ABC Corp is considering a new project: the project requires an initial cost of $375,000, and will not produce any cash flows for the first two years. Starting in year 3, the project
will generate cash inflows of $528,000 a year for three years. This project has higher risk compared to other projects the firm has, so it is assigned with a discount rate of 18%.
What is the project's net present value?
$773,016.1
$218,693.6
$449,487.3
$824,487.3
Oa
b.
C₂
d.
Jazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life.
After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
Chapter 11 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 11 - Prob. 1QTDCh. 11 - Prob. 2QTDCh. 11 - Prob. 3QTDCh. 11 - Prob. 4QTDCh. 11 - Prob. 5QTDCh. 11 - Prob. 6QTDCh. 11 - Prob. 7QTDCh. 11 - Prob. 8QTDCh. 11 - Prob. 9QTDCh. 11 - Prob. 10QTD
Ch. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 15PCh. 11 - Prob. 16PCh. 11 - Prob. 17PCh. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Prob. 28PCh. 11 - Prob. 29P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. A) What is the NPV of the new product? B) After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?arrow_forwardSeveral companies, including Barnyard and Energy Solutions Corporation, are considering project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Barnyard. Project A is a project that would require an initial investment of $78,000 and then produce an expected cash flow of $101,300 in 4 years. Project A has an internal rate of return of 7.65 percent. The weighted-average cost of capital for Barnyard is 10.92 percent and the weighted-average cost of capital for Energy Solutions Corporation is 5.21 percent. What is the NPV that Energy Solutions Corporation would compute for project A? $-2568.40 (plus or minus $10) $144922.17 (plus or minus $10) $-11077.83 (plus or minus $10) $4676.36 (plus or minus $10) None of the above is within $10 of the correct answerarrow_forwardIndustrialization Enterprise has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV if Industrialization Enterprise delays starting the project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) $9,704 $1,880 O$9,719 O $2,089 What is the value of Industrialization Enterprise's option to delay the start of the project? (Note: Do not round intermediate calculations and round i your answer to the nearest whole dollar) O $1,880 O $2,089 O $9,719 $9,704 Grade It Now Save & Continuearrow_forward
- White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Alpha Moose Transporters has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of the year. The company's earnings and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Alpha Moose expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be White Lion Homebuilders Co.'s addition to earnings for this year is expected to be…arrow_forwardWhite Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places).arrow_forwardCold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $3,000,000. The project’s expected cash flows are: Year Cash Flow Year 1 $325,000 Year 2 –125,000 Year 3 425,000 Year 4 425,000 Cold Goose Metal Works Inc.’s WACC is 9%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 17.95% -19.42% 20.78% 22.67% If Cold Goose Metal Works Inc.’s managers select projects based on the MIRR criterion, they should this independent project.arrow_forward
- Sunland, Inc. management is considering purchasing a new machine at a cost of $4,390,000. They expect this equipment to produce cash flows of $845,890, $819,250, $917,830, $1,103,400, $1,093,260, and $1,306,800 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) The NPV is $enter the NPV in dollars rounded to 0 decimal placesarrow_forwardgalbraith co. is considering a four-year project that will require an initial investment of $12,000. the base-case cash flows for this project are projected to be $12,000 per year. the best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be –$3,000 per year. the company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. the analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. what would be the expected net present value (npv) of this project if the project’s cost of capital is 11%?arrow_forwardCelestial 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?arrow_forward
- 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.arrow_forwardOmegaTech is considering project A. The project would require an initial investment of $58,500.00, and then have an expected cash flow of $72,800.00 in 4 years. Project A has an internal rate of return of 9.57 percent. The weighted-average cost of capital for OmegaTech is 6.69 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 -$11.24. The NPV that Omega Tech would compute for project A is greater than -$11.24 but less than $0.00. 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.arrow_forwardThe 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,…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Profitability index; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Md5ocNqKHq8;License: Standard Youtube License