Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Question
Chapter 26, Problem 5P
a.
Summary Introduction
Calculate the
b.
Summary Introduction
Calculate the NPV if franchise is renewed.
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NUBD Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process X has a cost of P8,000 and will produce net cash flows of P5,000 per year for 2 years. Process Y will cost P11,500 and will produce cash flows of P4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if NUBD’s cost of capital is 10 percent, by what amount will the better project increase NUBD’s value?
A. P 677.69
B. P1,098.89
C. P1,179.46
D. P1,237.76
E. P1,312.31
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a 2-year franchise to
sell the wigs is $20,000. If demand is good (40% probability), then the net cash flows will be $25,000 per year for 2 years. If demand is bad (60% probability), then
the net cash flows will be $5,000 per year for 2 years. Fethe's cost of capital is 10%.
a. What is the expected NPV of the project? Round your answer to the nearest dollar.
$
b. If Fethe makes the investment today, then it will have the option to renew the franchise fee for 2 more years at the end of Year 2 for an additional payment
of $20,000. In this case, the cash flows that occurred in Years 1 and 2 will be repeated (so if demand was good in Years 1 and 2, it will continue to be good
in Years 3 and 4). Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.3667 and that the
risk-free rate…
Haslam Homes is considering designing and marketing a concrete, yurt-based pre-fabricated home to compete in the doomsday prepper market. Development will cost $1,000,000 and will take one year. If the yurts are popular (30% probability) the cash flows will be $500,000 per year for 5 years starting in Year 1. If the yurts are not a hit (70% probability) the cash flows will be $100,000 per year for 5 years. Calculate the ENPV of the project. Haslam's cost of capital is 10%.
-$137,212
-$150,934
-$166,027 correct answer
-$182,630
-$200,893
DO NOT USE EXCEL
Chapter 26 Solutions
Financial Management: Theory & Practice
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