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? O

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? O

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 19P

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The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?
Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway’s president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 – $5 – $20 = $34 million. Branch probabilities are also shown for the chance events. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? What must the selling price be for the company to consider selling the rights to the product? Develop a risk profile for the optimal strategy.
OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $3.8 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $540,000 per year in direct labor costs. The company requires a 12% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)a. Compute the proposed investment’s net present value.b. Using the answer from part a, is the investment’s internal rate of return higher or lower than 12%? Hint: It is not necessary to compute IRR to answer this question.
A firm evaluates all its projects by applying the IRR rule. the current proposed project has a cash flow of negative 37,048 dollars, 16,850 15,700 and 19,300 for years zero to three, respectfully. The required return is 18%. what is the project IRR? should the products be accepted or rejected?
Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $125,600. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,500, and annual cash outflows would increase by $42,000. The company’s required rate of return is 8%. Click here to view PV table.Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value ________? Whether this project should be accepted? The project should be ACCEPTED OR DECLINED???? .
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I need solutions for questions d, e, f, g, h and i. Thanks d. Are this project’s cash flows likely to be positively or negatively correlated withreturns on Cory’s other projects and with the economy, and should this matter in youranalysis? Explain.e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines thatwill upgrade its manufacturing plant. These machines are considered average-riskprojects, so management will evaluate them at the firm’s 10% WACC. Machine Xhas a life of 4 years, while Machine Y has a life of 2 years. The cost of each machineis $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. Themanufacturing plant is very successful, so the machines will be repurchased at the endof each machine’s useful life. In other words, the machines are “repeatable” projects.1. Using the replacement chain method, what is the NPV of the better machine?2.…
e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines thatwill upgrade its manufacturing plant. These machines are considered average-riskprojects, so management will evaluate them at the firm’s 10% WACC. Machine Xhas a life of 4 years, while Machine Y has a life of 2 years. The cost of each machineis $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. Themanufacturing plant is very successful, so the machines will be repurchased at the endof each machine’s useful life. In other words, the machines are “repeatable” projects.1. Using the replacement chain method, what is the NPV of the better machine?2. Using the EAA method, what is the EAA of the better machine?
XYZ Co. hires a financial consultant to help evaluate whether or not to launch a new line of perfumed shark attractants. The consultant charges a fee of $10,000, half of which must be paid up-front and half to be paid when the project evaluation is completed. The consultant’s fees can be considered a/an _______ of the project. Select one: a. financing cost b. sunk cost c. opportunity cost d. side effect e. cash outflow
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Your company is planning to add a piece of equipment with 7 years of expected life for its production line. There will be no salvage value at the end of its life. The company has set its MARR to 11%. Your manager asks you to use incremental analysis to evaluate the alternatives and let him know which one of them should be chosen. Below is the data provided to you with the investment cost, annual income and IRR for each of the five alternatives. A B C D E Capital investment $14,000 $16,000 $16,500 $17,200 $20,000 Net annual income $3,000 $3,500 $3,700 $3,750 $4,300 IRR 11.30% 11.95% 12.73% 11.84% 11.41%
Generro Company is considering the purchase of equipment that would cost$60,000and offer annual cash inflows of$16,300over its useful life of 5 years. Assuming a desired rate of return of10%, is the project acceptable? (PV of \$1 and PVA of \$1) (Use appropriate factor(s) from the tables provided.) Mitiple Choice The answer cannot be detergined. No, since the negative net present value indicates the investmeot will yield a fate of retum below the desred tate of return. Yes, since the investment will generate$81.500in future cosh flows, which is gremer than the purchase cont of$60,000Yes, since the positve net present valse ind cates the investment will eam a rate of return greater than10 h.