Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 23, Problem 6QP
Summary Introduction
To determine: The expected loss per year on $305 million worth building.
Introduction:
In financial perspective, the insurance is a protection from the financial losses. It is one of the popular instruments, which prevents potential loss of an individual or a company with minimal cost. Generally, it is imperative to protect the companies from uncertainty or abnormal events.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
21. An investor is considering the purchase of an office complex. Next year's NOI and cash
flow is expected to be $1,000,000 and economic forecast of market supply and demand
and vacancy levels will continue to be in balance. As a result NOI should increase by 4
percent each year and the investor believes she should earn 12% total return on the
investment. What is the NPV of this investment if the purchase price is $13M?
a. -777,778
b. -500,000
c. +500,000
d. 8,333,333
e. Some other amount
8. Consider the quantitative version of the risk formula
A. What quantity (dollar value) of risk is generated by a threat that will cause $5,000,000 in
damage if it occurs, and has a 0.1% chance of occurring in any given year?
B. Based on the quantitative risk calculated in part A, is it worth deploying a control that costs
$50,000 per year (easily possible if it requires hiring a dedicated employee)?
C. Consider the case that $5,000,000 in damages is likely to greatly exceed both the total
revenue and the emergency cash reserve of a small business (which typically recommended
to be in the ballpark of 6 months of operating expenses). How would you rate this threat for
such a company, qualitatively?
D. Based on the qualitative risk assessed in part C, is it worth deploying a control that costs
$50,000 per year? Why or why not?
2. Calculating Payback [LO2] An investment project
provides cash inflows of $745 per year for eight years. What
is the project payback period if the initial cost is $1,700?
What if the initial cost is $3,30o? What if it is $6,100?
Chapter 23 Solutions
Fundamentals of Corporate Finance
Ch. 23.1 - Prob. 23.1ACQCh. 23.1 - Prob. 23.1BCQCh. 23.2 - Prob. 23.2ACQCh. 23.2 - Prob. 23.2BCQCh. 23.3 - What is a forward contract? Describe the payoff...Ch. 23.3 - Prob. 23.3BCQCh. 23.4 - Prob. 23.4ACQCh. 23.4 - Prob. 23.4BCQCh. 23.5 - Prob. 23.5ACQCh. 23.5 - Prob. 23.5BCQ
Ch. 23.5 - Prob. 23.5CCQCh. 23.6 - What is a futures option?Ch. 23.6 - Prob. 23.6CCQCh. 23 - Keith is preparing a graph that compares the value...Ch. 23 - Prob. 23.3CTFCh. 23 - Prob. 23.6CTFCh. 23 - Prob. 1CRCTCh. 23 - Prob. 2CRCTCh. 23 - Prob. 3CRCTCh. 23 - Prob. 4CRCTCh. 23 - Prob. 5CRCTCh. 23 - Prob. 6CRCTCh. 23 - Options [LO4] Explain why a put option on a bond...Ch. 23 - Prob. 8CRCTCh. 23 - Prob. 9CRCTCh. 23 - Prob. 10CRCTCh. 23 - Prob. 11CRCTCh. 23 - Hedging Exchange Rate Risk [LO2] If a U.S. company...Ch. 23 - Hedging Strategies [LO1] For the following...Ch. 23 - Prob. 14CRCTCh. 23 - Prob. 15CRCTCh. 23 - Prob. 16CRCTCh. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 4QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 6QPCh. 23 - Prob. 7QPCh. 23 - Interest Rate Swaps [LO3] ABC Company and XYZ...Ch. 23 - Prob. 9QPCh. 23 - Prob. 10QPCh. 23 - Prob. 1MCh. 23 - Prob. 2MCh. 23 - Prob. 3MCh. 23 - Prob. 4MCh. 23 - Prob. 5MCh. 23 - Are there any possible risks Joi faces in using...
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
- 43. Declining perpetuities and annuities (S2.3) You own an oil pipeline that will generate a $2 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 4% per year. The discount rate is 10%. 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 20 years?arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.1010.10 million today and $5.105.10 million in one year. The government will pay you $21.2021.20 million in one year upon the building's completion. Suppose the interest rate is 10.2 % 10.2 %. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today?arrow_forward14. Project Evaluation [LO1] Your firm is contemplating the purchase of a new $580,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $60,000 at the end of that time. You will save $210,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $75,000 (this is a one-time reduc- tion). If the tax rate is 35 percent, what is the IRR for this project?arrow_forward
- You run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $9.70 million today and $5.10 million in one year. The government will pay you $20.20 million in one year upon the building's completion. Suppose the interest rate is 10.9%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.)arrow_forward1 Solve the following rate of return problems. a. An investment of $1,700 today returns $64,000 in 50 years. What is the internal rate of return on this investment? b. An investment costs $850,000 today and promises a single payment of $12.9 million in 22 years. What is the promised rate of return, IRR, on this investment? c. What return do you earn if you pay $24,410 for a stream of $4,000 payments lasting 10 years? Note: Round your answers to 2 decimal places. a. IRR b. IRR c. IRR 7.53 % %arrow_forwardYou run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.2 million today and $4.7 million in one year. The government will pay you $20.7 million in one year upon the building's completion. Suppose the interest rate is 10.6%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of the proposal is $million (Round to two decimal places.) CZTEarrow_forward
- You run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $9.5 million today and $5.5 million in one year. The government will pay you $21.7 million in one year upon the building's completion. Suppose the interest rate is 10.3%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? www. a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select the best choice below.) O A. The firm can borrow $19.67 million today and pay it back with 10.3% interest using the $21.7 million it will receive from the government. B. The firm can borrow $15.0 million today and pay it back with 10.3% interest using the $21.7 million it will receive from the government. O C. The firm can borrow $15.0 million today and pay it back with 10.3% interest using the $19.67 million it will…arrow_forwardQ#5. [10 pts] Calculating Net Present Values and Making the Financial Decisions General Electric (GE) has the opportunity to invest in 2 projects. Project A requires an investment of $1M which will give a return of $300,000 each year for 5 years. Project B requires an investment of $750,000 which will give a return of $100,000, $150,000, $200,000, $250,000 and $ 250,000 for the next 5 years. Then Calculate the Net Present Value (NPV) which can be used to decide which opportunity is better and should be invested in. For Project A A 6 For Project A 7 8 10 11 12 13 14 15 16 17 Discount Rate Initial Investment Year 1 2 3 4 5 10% $1,000,000 Cash Flows $300,000 $300,000 $300,000 $300,000 $300,000 For Project B 23 For Project B 24 25 Discount Rate 26 Initial Investment 27 28 30 31 32 33 34 Year 1 2 3 4 5 B 10% $750,000 Cash Flows $100,000 $150,000 $200,000 $250,000 $250,000arrow_forwardvvk.4 You are the financial manager of the utility company American Power Inc. and you are considering the construction of a nuclear power plant. The proposed facility costs $2,400 million to build, then it will produce cash flows of $300 million at the end of every year for 12 years, and eventually it is decommissioned at a cost of $850 million at the end of year 12. What is the NPV of the nuclear power plant? Assume an interest rate of 15% per year. Answer in millions of dollars with 2 decimals (for example, if your answer is 1,000,000 enter 1.00). Also, if you answer is negative put a negative sign in your answer.arrow_forward
- #27 * Finding the Internal Rate of Return (IRR) of an Investment: A company is considering buying a new piece of machinery that costs $8M and has a salvage value of $1.5M at the end of its 10-year useful life. The machinery nets $2.3M per year in annual revenues. MARR = 10%. The internal rate of return (IRR) on this investment is approximately _____________. A. 26% B. 31% C. 19% D. 16%arrow_forward4. Calculating Discounted Payback [LO3] An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 11 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if the initial cost is $6,40o? What if it is $10,400?arrow_forwardYou run a construction firm. You have just won a contract to build a government office building. It will take one year to construct it, requiring an investment of $10.00 million today and $5.00 million in one year. The government will pay you $20.00 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%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of this opportunity is $3.64 million. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select from the drop-down menus.) The firm can borrow firm can use cost of today, and pay it back with 10% interest using the to cover its costs today and save in cash for the firm today. of the next year. This leaves it will receive from the government. The in the bank to earn 10% interest to cover itsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
PFIN (with PFIN Online, 1 term (6 months) Printed...FinanceISBN:9781337117005Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
PFIN (with PFIN Online, 1 term (6 months) Printed...
Finance
ISBN:9781337117005
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning