PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 10PS
Summary Introduction
To discuss: The appropriate option according to the given statement.
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You are considering purchasing a new database system for your company. The system will cost $80,000, and it will cost another $15,000 for equipment and training. The system is expected to be sold after three years, when you plan to outsource database activities. You hope that you can sell your system to a competitor for $12,000. You expect to save $22,000 per year in operating costs. Your corporate cost of capital is 10%.
What is the project’s net investment outlay at Year 0?
What are the projects’ operating cash flows in Years 1, 2, and 3?
What is the terminal cash flow at the end of Year 3?
If the project has average risk, is it expected to be profitable? On what basis did you draw this conclusion? .
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.
Consider Decision Tree Analysis
Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business?
The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?
The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.
Consider Decision Tree Analysis
If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment?
Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits?
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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