Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 7, Problem 18QAP
a.
Summary Introduction
Adequate information:
Price per unit = $43
Quantity sold = 9,100 units
Discount rate (r) = 16%
Time period (t) = 9 years
Abandonment value = $810,000
Probability of failure of the project = 0.50
Operating cash flow (OCF) = $279,500
Cost of the project (C) = $980,000
To determine: The
Introduction: NPV refers to the difference between the aggregate value of
b.
Summary Introduction
Adequate information:
Price per unit = $43
Quantity sold = 3,700 units
Discount rate = 16%
Time period = 9 years
Abandonment value = $810,000
Probability of failure of the project = 0.50
To determine: Value of the option to abandon
Introduction: Present value refers to the discounted value of future cash flows in which discounting rate and time period are known.
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Students have asked these similar questions
In a few sentences, answer the following question as completely as you can.
According to your textbook, “an investment should be accepted if the net present value is positive and rejected if it is negative” (p. 239). What does an NPV of zero mean?If you were a financial decision maker facing a project with NPV of zero (or close to zero) what would you do? Can you think of any other factors that might influence your decision?
You are considering the following projects but have
limited funds to invest and can't take them all. Using the
profitability index, rank the projects in the order in which
you would accept them. That is, rank them from best to
worst.
Project
Initial Investment
NPV
An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below.
Economic Condition
Investment
Poor
Average
Good
Excellent
(S1)
(S2)
(S3)
(S4)
A
50
75
20
30
B
80
15
40
50
C
-100
300
-50
10
D
25
25
25
25
What decision would be made under minimax regret?
Chapter 7 Solutions
Corporate Finance
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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Similar questions
- If a company has an option to abandon a project, would this tend to make the company more or less likely to accept the project today?arrow_forward(a) If you apply the payback decision rule, which investment will you choose? Why? (b) If you apply the NPV decision rule, which investment will you choose? Why? (c) If you apply the IRR decision rule, which investment will you choose? Why? (d) Based on your answers of (a) to (c), which project will you (eventually) choose? Why?arrow_forward16. Which of the following statements regarding the net present value rule and the rate of return rule is false? A. Accept a project if NPV > cost of investment.B. Accept a project if NPV is positive.C. Accept a project if return on investment exceeds the rate of return on an equivalent-risk investment in the financial market.D. Reject a project if NPV is negative.arrow_forward
- Which of the following would cause a project to have a lower net present value, thereby making the project less appealing? A. The discount rate increases B. The cash flows are extended over a longer period of time. C. The investment cost decreases without affecting the expected income and life of the project. d. The cash flows are accelerated and the project life is correspondingly shortened.arrow_forwardIn engineering economics, if PW < 0 this means to reject the project, because it is not economically justified. In other words, it produces a return that is less than MARR. Select one: True O Falsearrow_forwardThe project is accepted اخترأحد الخيارات a. If the profitability index is zero b. if the profitability index is less than one c. If the profitability index is greater than hundred d. If the profitability index is negative e. None of the option What is the limitation of Traditional approach of Financial Management? اخترأحد الخيارات a. All of the option b. More emphasis on long term problems c. Ignores allocation of resources d. One-sided approacharrow_forward
- Which of the following statements is true? Multiple Cholce There Is no correlation between net present value and Internal rate of return. A project with a positive net present value will have a discount rate that Is greater than the Internal rate of return. None of the statements are true Glven several projects with positive net present values, the company should choose the project with the hlghest net present value. A project with a positive net present value will have a discount rate that Is less than the Internal rate of return.arrow_forwardIf a company has an option to abandon a project, would this tend to makethe company more or less likely to accept the project today?arrow_forwardShould companies bid for a project with a price under the "project bid price"? No, this will not make financial sense. It depends on the project payback time. Yes, because they will still have positive profits.arrow_forward
- Consider the following statement about real options: The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option. True or False: The preceding statement is correct. False True Which type of real option allows a firm to shut down a project if its cash flows are lower than expected? Investment timing option Flexibility option Abandonment option Growth option King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York…arrow_forwardWill you accept or reject the project? OAccept ○ Reject At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cost savingsarrow_forwardhe project is accepted Select one: a. None of the option b. If the profitability index is negative c. If the profitability index is zero d. If the profitability index is greater than one e. if the profitability index is less than onearrow_forward
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