18. Suppose the marine salvage company described in the previous problem has located another ship that also contains treasure that could be sold for $12.1 million if it were brought to the surface. The firm is certain that if it invests $6.6 million now, it can recover the treasure in 1 year at no additional cost. The uncertainty now relates to the ownership of the ship. A government agency is currently considering whether the treasure found at this location belongs wholly to the finder or must be shared with a previous owner. In the latter case, the finder would be allowed to recover its direct costs ($6.6 million) but would have to turn over to the previous owner the remaining proceeds from the sale of the treasure. A ruling on this issue is expected in 1 year. The salvąge company's manager believes the probability of a favorable ruling is 0.3. The rate of interest is 10%. What is the expected NPV of waiting until the ownership issue is settled in 1 year before deciding whether to undertake the project? (a) -1.2 million (b) -0.2 million (c) 0.2 million (d) 1.2 million (e) 2.2 million

18. Suppose the marine salvage company described in the previous problem has located another ship that also contains treasure that could be sold for $12.1 million if it were brought to the surface. The firm is certain that if it invests $6.6 million now, it can recover the treasure in 1 year at no additional cost. The uncertainty now relates to the ownership of the ship. A government agency is currently considering whether the treasure found at this location belongs wholly to the finder or must be shared with a previous owner. In the latter case, the finder would be allowed to recover its direct costs ($6.6 million) but would have to turn over to the previous owner the remaining proceeds from the sale of the treasure. A ruling on this issue is expected in 1 year. The salvąge company's manager believes the probability of a favorable ruling is 0.3. The rate of interest is 10%. What is the expected NPV of waiting until the ownership issue is settled in 1 year before deciding whether to undertake the project? (a) -1.2 million (b) -0.2 million (c) 0.2 million (d) 1.2 million (e) 2.2 million

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 12P: After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide...

See similar textbooks

Similar questions

A mining company isconsidering a new project. Because the mine has received a permit, the project wouldbe legal, but it would cause significant harm to a nearby river. The firm could spend anadditional $10 million at Year 0 to mitigate the environmental problem, but it would notbe required to do so. Developing the mine (without mitigation) would cost $60 million,and the expected cash inflows would be $20 million per year for 5 years. If the firm doesinvest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACCis 12%.a. Calculate the NPV and IRR with and without mitigation.b. How should the environmental effects be dealt with when this project is evaluated?c. Should this project be undertaken? If so, should the firm do the mitigation?
Please refer to picture for the complete question. Please answer parts A and B A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $11 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $69 million, and the expected cash inflows would be $23 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $24 million. The risk-adjusted WACC is 14%.
59. The Mellow Machine Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is P600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm’s annual cash inflows (before considering depreciation) of P180,000. The machine will be depreciated as follows for tax purposes: Year Depreciation 1 P200,000 2 266,700 3 88,860 4 44,440 Mellow is currently in the 40 percent tax bracket. A 10 percent after-tax rate of return is desired. (Round off your PV factors to 5 decimal places.) What is the accounting rate of return based on initial investment? Group of answer choices 6.0 % 3.0% 21.2% 12.0%
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.66 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mitigation) would require an initial outlay of $57 million, and the expected cash inflows would be $19 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $20 million. The risk-adjusted WACC is 11%. a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. NPV: $ million IRR: % Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not…
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.66 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mitigation) would require an initial outlay of $57 million, and the expected cash inflows would be $19 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $20 million. The risk-adjusted WACC is 12%. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate…
Please answer Part C. Refer to the images to answer C A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $11 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $69 million, and the expected cash inflows would be $23 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $24 million. The risk-adjusted WACC is 14%. A. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.NPV: $ millionIRR: % Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be…
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.33 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would require an initial outlay of $54 million, and the expected cash inflows would be $18 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $19 million. The risk-adjusted WACC is 15%. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. NPV: $ million IRR: % Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not…
2 You have been asked to evaluate the proposed purchase of a new machine by your company. The price of the new machine is £250,000, and it will cost an additional £25,000 to adapt it to the company’s purpose. The company might try to sell the machine after five years, but it is very unlikely to get a meaningful (material) price. Depreciation is based on the straight-line method. Use of the machine would require an increase in net working capital of £15,000, which would be recovered in the final year of the investment. The machine is expected to save the firm £50,000 per year in operating costs. The corporate tax rate is 40%. Required: a. What is the initial investment outlay associated with the machine purchase? b. What is the terminal cash flow in year five? c. Critically examine the treatment of working capital in the above case. d. If the project’s required rate of return is 15%, should the equipment be purchased? e. Undertake a detailed critical evaluation of how your company could…
8. A nuclear power company is deciding whether tobuild a nuclear power plant at Diablo Canyon or atRoy Rogers City. The cost of building the powerplant is $70 million at Diablo and $95 million atRoy Rogers City. If the company builds at Diablo,however, and an earthquake occurs at Diablo duringthe next five years, construction will be terminatedand the company will lose $40 million (and will stillhave to build a power plant at Roy Rogers City).Without further expert information the companybelieves there is a 10% chance that an earthquakewill occur, at Diablo during the next five years. For$1.5 million, a geologist can be hired to analyze thefault structure at Diablo Canyon. She will predicteither that an earthquake will occur or that an earthquake will not occur. The geologist’s past recordindicates that she will predict an earthquake withprobability 0.90 if an earthquake will occur, andshe will predict no earthquake with probability 0.80if an earthquake will not occur. Should the…
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $51 million, and the expected cash inflows would be $17 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $18 million. The risk-adjusted WACC is 11% a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.NPV: $ millionIRR: % Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations.…
Macquarie and the UK Government have agreed a valuation of £1bn on the Green Investment Bank’s prized asset, Supermassive Made-up OffshoreWindfarm.But two days before Macquarie’s acquisition of the Green Investment Bank is due to be signed, a group of pirates take control of the seas around theOffshore Windfarm, meaning that maintenance ships will be less reliable if they needed to carry out repairs.Supermassive Made-up Offshore Windfarm• Is still expected to generate the same amount of electricity (3 million units a year) and achieve the same price for those units (£100 per unit), andis still expected to have the same operating profit margin (75%) and tax level (20%). There is no debt• Is still expected to operate for 10 years from the date of acquisition• Is now more risky because if something goes wrong there is no guarantee of repairsMacquarie and the UK Government therefore agree that the rate of return to be achieved by Macquarie should be higher by 2% -find the originally…
A construction company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted WACC is 12%. Calculate the NPV with and without mitigation. Show the workings