3. Scenario Analysis [LO2] Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,440 per unit; variable costs = $460 per unit; fixed $3.9 million; quantity = 85,000 units. Suppose the company believes all of its estimates are accurate only to within +15 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario? %3D costs =

3. Scenario Analysis [LO2] Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,440 per unit; variable costs = $460 per unit; fixed $3.9 million; quantity = 85,000 units. Suppose the company believes all of its estimates are accurate only to within +15 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario? %3D costs =

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 17PROB

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Q.3 (x1=70000 x2=10%) The IPS company has installed a system to help reduce the number of defective products. The capital investment in the system is $X1, and the projected annual savings are tabled below. The system's market value at the EOY five is negligible, and the MARR is x2% per year A. What is the FW of this investment? Based on econonical deciston rule, is this a good investment. b. What is the IRR of the system? Based on economical decision rule, is this a good investmentr. C. What is the discounted pavback period for this investment.
Calculating Flotation Costs [LO4] Suppose your company needs $24 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.a. What do you think about the rationale behind borrowing the entire amount?b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
5). The HC Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow I (in dollars) Cash Flow II (in dollars) 0 -64, 000 -18,000 1 31, 000 9,700 2 31, 000 9,700 3 31, 000 9,700 a). If the required return is 10%, and the company applies the profitability index decision rule, which project should the firm accept? Why? b). If the company applies the NPV decision rule, which project should it take? Why? c). Explain why your answers in (a) and (b) are different.
show all excel formulas/ work answering the following: LO2 27. Project Analysis You are considering a new product launch. The project will cost $780,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year, price per unit will be $16,300, variable cost per unit will be $11,100, and fixed costs will be $535,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate within +10 percent. What are the best and worst cases for these projections? What is the base-case NPV? What are the best- case and worst-case scenarios? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.
A3 8aii You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (ii) Profitability Index (PI)
[6:46 am, 15/01/2022] Mahmoud: 19. Cost of Capital. Pollution Busters, Inc., is considering a purchase of 10 additional carbon sequesters for $100,000 apiece. The sequesters last for only 1 year until saturated with carbon. Then the carbon is removed and sold. (O LO4) a. Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is guaranteed to be $115,000. How would you determine the opportunity cost of capital for this investment? b. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters' CFO learns that average rates of return from investment on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case? Is the purchase of an additional sequester a worthwhile capital investment if she expects that the price of extracted carbon will $115,000? please show the strps
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Reconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?
CH5 #10 A company is considering two alternative marketing strategies for a new product. Introducing the product will require an outlay of $15,000. With a low price, the product will generate cash proceeds of $10,000 per year and will have a life of two years. With a high price, the product will generate cash proceeds of $18,000 but will have a life of only one year. The hurdle rate for this project is 0.05. Which marketing strategy should be accepted?
1 Downside scenarios Consider a proposal to produce and market a new tennis racquet. The most likely outcome scenario for the project incl. Expected sales of 30,000 units per year, Unit price of $200, Variable cost per racquet of $120, Fixed cost of $1,200,000. The project will last for 10 years and requires an initial investment of $4 million, which will be depreciated straight-line over the project life to a fnal value of zero. The firm´s tax rate is 30%, and the required rate of return is 12%. 1. What is the project NPV? However, you recognize that some of these estimates are subject to error. Sales could fall 20% below expectations for the life of the project and, if that happens, the unit price would probably be only $150. The good news is that Öxed costs could be as low as $800,000, and total Variable costs1 would decline in proportion to sales. 2. What is NPV in the worst-case scenario?3. How else could you consider the downside scenario in your NPV calculation? (Answer…
3. Howard plc has calculated that a project in which it is investing $500,000 will generate either $150,000 in the best case scenario (likelihood 0.75) or $25,000 in the worst case scenario (likelihood 0.25) What is the project’s expected return for risk evaluation purposes ? 35.00% 23.75% 17.50% 11.25% 4. Davise Ltd is a young company which develops apps for a huge variety of clients. The work performed by Davise Ltd is complicated and its external environment is both complex and dynamic. A large number of its employees are directly involved inbuilding the apps. Activities are largely co-ordinated by informal communication and self-government. Davise Ltd has few managers and most employees report to more than one manager as they work on multiple apps for multiple clients. Which of the following types of organizational structure does Davise Ltd have ? Professional burreaucracy Simple Adhocracy Machine bureaucracy
3.4 Amber was evaluating the feasibility of a project that has an initial investment of $205,000 and subsequent investments of $155,000 in the 1st and 2nd years. From the 3rd year onwards, it will generate cost savings of $200,000 every year for 8 years. a. If the project has a terminal value of $100,000, what is the Internal Rate of Return (IRR)? b. Should the project be accepted if the company's cost of capital is 23.00%? Yes/No Kindly use all the decimals. DO NOT ROUND