Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 22, Problem 17PS
a.
Summary Introduction
To determine: The present value of payoffs.
a.
Expert Solution
Answer to Problem 17PS
The present value of payoffs is $16,875,000.
Explanation of Solution
Determine the present value of payoffs
Excel Spreadsheet:
Therefore, the present value of payoffs is $16,875,000.
b.
Summary Introduction
To determine: The abandonment value.
b.
Expert Solution
Answer to Problem 17PS
The abandonment value is $1,936,448.60.
Explanation of Solution
Determine the gain value
The gain value is calculated if the demand is buoyant.
Therefore the gain value is 33.33%.
Determine the loss value
The loss value is calculated if the demand is sluggish.
Therefore, the loss value is -11.11%.
Determine p
The value of put can be calculate using the risk neutral method, were p is identical to the probability of increase in the asset value.
Therefore p is 0.408.
Determine the abandonment value:
If the demand is sluggish the payoffs will be $0 and if the demand is buoyant the payoffs is $3,500,000.
Therefore, the abandonment value is $1,936,448.60.
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It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal…
Replacement project example: Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 13 years ago at a cost of $16,000. The printer is being depreciated using straight line basis assuming a useful life of 18 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life.
The new high-speed copier can be purchased for $23,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $18,000 to $9,000. This reduction in costs will cause before-tax profits to rise by an equal amount.
It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal…
You have been asked to evaluate two alternatives, X and Y, that may increase plant capacity for manufacturing high-pressure
hydraulic hoses. The parameters associated with each alternative have been estimated. Which one should be selected on the
basis of a present worth comparison at an interest rate of 10% per year? Why is yours the correct choice?
Alternative
First Cost
Maintenance cost, per
Year
Salvage Value
Life
X
$-25,000
$-8000
$1,000
5 years
Y
$-55,000
$-2000
$2,000
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and that of alternative Y is $1
The present worth of alternative X is $.
Alternativ (Click to select) is selected by the company.
Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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