PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 20PS
a.
Summary Introduction
To
b.
Summary Introduction
To determine: Whether the proposal makes sense.
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Deep Sea Drilling is evaluating drilling for oil in the Gulf of Mexico. It will cost $830 million to buy an oil rig. Drilling would start immediately. The company has a cost of capital of 11%.
There is a 50% probability that the new well will be succcessful, in which case the free cash flow from the well will be $200 million per year for 20 years. Otherwise, it will only generate $40 milion per year for 10 years.
What is the NPV of the project (in $ million)?
One oil company is considering 5 pipe sizes for a new pipeline. The costs for each of them are given below. Assuming that all the pipelines will last 15 years and that the company's minimum acceptable rate of return (MAAR) is 18% per year, determine which pipe size can be used based on A) present value method and B) incremental rate of return method.
Tube size in mm
140
160
200
240
300
Initial inversion
$9180
$10510
$13180
$15850
$30530
Installation Cost
$600
$800
$1400
$1500
$2000
Annual Cost Opperation
$6000
$5800
$5200
$4900
$4800
A company considering water flooding plan for
one its small oil field, the chances of success is as
flows:
Present
Probability
value
dollars
of water
flooding,
106
0.3
30
0.2
50
0.4
80
0.1
The cost would be 15 MM dollars.
The company has already
committed 30 MM to attractive
ventures whose outcome is still to
be decided, and there remains 10
MM dollars of venture capitol
available. Should the company
make the investment?
Management will take a 10% risk?
0
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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