Bellville Electric Company may invest in new power-switching equipment. The net PW of the three possible outcomes are $3430, $5870, and $6210. The probabilities of each outcome are .50, .30, and .20, respectively. Calculate the expected return and risk associated with this proposal.

Bellville Electric Company may invest in new power-switching equipment. The net PW of the three possible outcomes are $3430, $5870, and $6210. The probabilities of each outcome are .50, .30, and .20, respectively. Calculate the expected return and risk associated with this proposal.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 19EA: Redbird Company is considering a project with an initial investment of $265,000 in new equipment...

See similar textbooks

Related questions

Q: The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would…

A: The question is based on the concept of Financial Management.

Q: Cisco, Inc., has a proposal from the Engineering Planning Division to invest Cisco retained earnings…

A: Initial Investment Projection: Year 0 = $4,100,000 Year 7 = $2,800,000 Year 11 = $93,935 i = 11%

Q: A company that manufactures rigid shaft couplings has $600,000 to invest. The company is considering…

A: The overall return generated by an organization by investing in various projects/asset class is…

Q: The plant manager of IHK is considering the purchase of a new robotic assemble plant. The new…

A: Given ,Cost of plant- $250,000Direct labour savings- $ 62,500 per yearNumber of years-10a)…

Q: The management of Penfold Corporation is considering the purchase of a machine that would cost…

A: Given information : Discount rate 13% Time period (years) 5 Cost lowering benefits $…

Q: The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would…

A: Profitability index (Present Value / Initial Investment)

Q: Suppose your firm is considering investing in a project with the cash flows shown below, that the…

A: NPV can be calculated by following function in excel =NPV(rate,value1,[value2],…) + Initial…

Q: Two design alternatives for a new ride called the Scream Machine, the first of which requires an…

A: The External Rate of Return (ERR) is calculated based upon rate of return on cash flows considering…

Q: A project will cost $20,000 today and yield cash inflows of $15,000 and $25,000 at the end of Year 1…

A: Given:

Q: he management of Digital Waves, Inc. is considering a project with a net initial cost of $115,000…

A: Internal rate of return: It is the discount rate at which the net present value of a project would…

Q: Redbird Company is considering a project with an initial investment of $300,000 in new equipment…

A: Internal rate of return is a discount rate that is used in project analysis or capital budgeting…

Q: A company just paid $10 million for a feasibility study. If the company goes ahead with the project,…

A: Initial cost = $100 million in year 0 and $20 million in year 1 CF2 = $80 million CF3 = $90 million…

Q: Pepper Co is contemplating three available investment opportunities, the cash flows of which are…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: Alpha corp is considering an investment that has a cost of $285,000. The table below shows the cash…

A: Internal rate of return at which present value of cash flow is zero. Initial investment is equal to…

Q: Tyler, Inc., is considering switching to a new production technology. The cost of the required…

A: IRR is the rate at which NPV is Zero.

Q: Kikwetu Limited is considering investing in a project with the following expected cashflows:…

A: Profitability index means the division of cash inflow with cash outflow of the project. Since…

Q: Kikwetu Limited is considering investing in a project with the following expected cashflows:…

A: Profitability Index is the ratio of present value of inflows to present value of cash flows. Present…

Q: option of a new system will lead to a reduction of the cost by as much as 17%. The cost of the new…

A: The net gain or loss of an investment over a specific period stated as a percentage of the…

Q: The management of Leitheiser Corporation is considering a project that would require an initial…

A: given, initial cashflow= $49000 pv of cash inflows= $70580

Q: A company just paid $10 million for a feasibility study. If the company goes ahead with the project,…

A: Net present value is the difference of all the discounted cash inflows and outflows.

Q: Cullumber Company is considering a long-term investment project called ZIP. ZIP will require an…

A: Net Present value is present value of cash flow minus initial investment

Q: rence Corp. is considering the purchase of a new piece of equipment. When discounted at a hurdle…

A: Internal rate of the return at which the present value of cash inflows is equal to the present value…

Q: Suppose the MARR is 10% with probability 0.25, 12% with probability 0.50, and 15% with probability…

Q: The management of Penfold Corporation is considering the purchase of a machine that would cost…

A: The Net Present value is excess of Present value of Cash Inflow over Present Value of Cash Outflow…

Q: Nikita Berhad is evaluating a project which expected to earn a series of cash inflows as shown in…

A: NPV technique assesses the project by analyzing the discounted value of all future cash flows. If…

Q: The James Company is considering an investment with a cost today of $1,500,000 and which will…

A: The payback period states the length of time taken to recover the initial cost

Q: Benson Designs has prepared the following estimates for a long-term project it is considering. The…

A: Cost of Capital is 5 years To Find: NPV IRR

Q: payback period for this project?

A: Payback period is the number of years required to fully recover the initial investment.

Q: Pablo Company is considering buying a machine that will yield income of $3,300 and net cash flow of…

A: Net present value is the net amount of total cash outflow and net cash inflows discounted at the…

Q: GoGo Inc. is considering a new project that requires an initial investment of $36140 and will…

A: Answer : Profitability Index = Present value of cash inflows / Present value of cash outflows

Q: The management of Penfold Corporation is considering the purchase of a machine that would cost…

A: Net Present Value(NPV) of a project is equivalent to the difference between the present value of…

Q: The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would…

A: Rank of the Projects according to the profitability index, from most profitable to least profitable…

Q: Mayberry, Inc., is considering a design change that will cost $6,000 and will result in an annual…

A: The AW method is commonly used for comparing alternatives. AW means that all incomes and…

Q: The management of Penfold Corporation is considering the purchase of a machine that would cost…

A: The net present value is the difference between the present value of cash inflows and the present…

Q: The plant manager of IHK is considering the purchase of a new robotic assemble plant. The new…

A: “Hey, since your question has multiple sub-parts, we will solve first three sub-parts for you. If…

Q: Niagra Falls Power and Light is considering a project that will produce annual cash flows of…

A: YEAR CASH FLOW 0 $ (113,500.00) 1 $ 37,500.00 2 $…

Q: An electronic circuit board manufacturer is considering six mutually exclusive cost-reduction…

A: From the incremental investment data given in the question:

Q: Concose Park Department is considering a new capital investment. The cost of the machine is…

A: Net Present Value = Present Value of Cash Inflows – Present Value of Cash Outflows where, Present…

Q: If the project rate of return is 12% on its investments, should it accept this project? Why? Compute…

A: Capital budgeting is defined as the process through which any business evaluates major projects such…

Q: Winston Clinic is evaluating a project that costs $52, 125 and has expected net cash inflows of…

Q: The company is considering two projects. The initial investment in the Project A and B are $50,000…

A: Given:Initial investment in project A is $50000 and project B is $60000Annual cash flow of project A…

Q: A city is analyzing two alternatives for generating electricity. The first is the construction of a…

A: Net Present Value An economic metric known as net present value (NPV) adds up all potential inflows…

Q: Wayne Company is considering a long-term investment project called ZIP. ZIP will require an…

A: Net present value of the project means difference of present value of cash inflows and present value…

Q: OptiLux is considering investing in an automated manufacturing system. The system requires an…

A: Net Present Value (NPV) :— It is the sum of present value of all cash flows. It is also calculated…

Q: IRRs

A: IRR stands for internal rate of return is a process of computing the percentage of return over…

Q: Lara Technologies is considering a cash outlay of $230,000 for the purchase of land, which it could…

A: Opportunity Cost: Opportunity cost refers to the forgone revenue that could have been generated…

Q: The plant manager of IHK is considering the purchase of a new robotic assemble plant. The new…

A: Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

9.
Bellville Electric Company may invest in new power-switching equipment. The net PW of the three
possible outcomes are $3430, $5870, and $6210. The probabilities of each outcome are .50, .30, and
.20, respectively. Calculate the expected return and risk associated with this proposal.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Suppose the MARR is 10% with probability 0.25, 12% with probability 0.50, and 15% with probability 0.25; what is the probability that Alternative A is the most economic alternative? Two investment alternatives are being considered. Alternative A requires an initial investment of $15,000 in equipment; annual operating and maintenance costs are anticipated to be normally distributed, with a mean of $5,000 and a standard deviation of $500; the terminal salvage value at the end of the 8-year planning horizon is anticipated to be normally distributed, with a mean of $2,000 and a standard deviation of $800. Alternative B requires endof-year annual expenditures over the planning horizon. The annual expenditure will be normally distributed, with a mean of $8,000 and a standard deviation of $750. Using a MARR of 15%, what is the probability that Alternative A is the most economic alternative?
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.
Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?
Aliska plc is investing £990,000 in a project. If it is a success then the return will be £230,000. However, if a particular risk occurs the return will reduce to £10,000. The probability of this risk occurring is 02 What is the project's expected return on the investment for risk evaluation purposes? A. 4.85% B. 5.45% C. 18.79% D. 19.39%
The Webex Corporation is trying to choose between the following two mutually exclusive designprojects: Year Net Cash Flow Project - I($) Net Cash Flow Project - II($) 0 (53,000) (16,000) 1 27000 9100 2 27000 9100 3 27000 9100 (a) If the required return is 10% and the company applies the Profitability Index decision rule,which project should the firm accept?(b) If the company applies the Net Present Value decision rule, which project should it take?(c) Explain why your answers in (a) and (b) are different(d) Calculate the Internal Rate of Return of both projects.
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. project 1 project 2 initial investment $(510,000) $(685,000) cash flow year 1 485,000 610,000 Compute the following for each project: NPV (net present value) PI (profitability index) IRR (internal rate of return) Based on your analysis, answer the following questions : Which is the best choice? Why? Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $3,529,783 . The discount rate is 13.99 percent. The cash flows that the firm expects the new technology to generate are as follows. a. Compute the payback and discounted payback periods for the project. b. What is the NPV for the project? Should the firm go ahead with the project? c. What is the IRR, and what would be the decision based on the IRR? Years CF 0 $(3,529,783) 1-2 0 3-5 $916,204 6-9 $1,590,056
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1 Project 2 Initial investment $(684,000) $(585,000) Cash inflow Year 1 $275,000 $380,000 Compute the following: NPV (net present value) PI (profitability index) IRR (internal rate of return) Based on your analysis, answer the following questions: Which is the best choice? Why? Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain. What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain. Should we also use the payback method to assist us in project selection? Why or why not? Explain.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow −1,010 110 490 690 690 290 690 Use the payback decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice 4.00 years, reject 0 years, accept 2.59 years, reject 1.16 years, accept
Consider a project with free cash flows in one year of $134,759 in a weak market or $168,566 in a strong market, with each outcome being equally likely. The initial investment required for the project is $110,000, and the project's unlevered cost of capital is 20%. The risk-free interest rate is 9%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that is, what is the initial market value of the unlevered equity? c. Suppose the initial $110,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM? Assume that the risk-free rate…