Chris has to decide between 2 SME's who want to assist in his project. Vendor 1 has a 30% chance of failure and this will have an adverse impact of $1000 to his project. But if Vendor 1 succeeds, there is a 70% chance of a $6000 gain.
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- As an staff at company, you are considering two projects which project A has an initial investment of $100,000 and yearly revenue of $17, 600 for 10 years, and Project B has an initial investment of $51,000 and yearly revenue of $10, 100 for 10 years. What is the point of indifference? Which project would you accept at a WACC of 16.0%? a) Point of indifference does not exist, accept project B b)Point of indifference at 8.60%, accept both Project A and Project B c) Point of indifference at 8.60%, don't accept Project A and don't accept ProjectB d) Point of indifference at 14.84%, accept Project B. e) Point of indifference at 11.86%, accept Project B f)Point of indifference at 11.86%, accept Project ACT Corp. is considering a project that has an up-front cost at t = 0 of P24,000. The project’s subsequent cash flows are critically dependent on whether a competitor’s product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, Mano's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact Mano. There is a 75% chance that the competitive product will be rejected, in which case Mano's expected cash flows will be P8,000 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor’s product will be approved, in which case the expected cash flows will be only P600 at the end of each of the next seven years (t = 1 to 7). Mano will know for sure one year from today whether the competitor’s product has been approved. CT Corp. is considering whether to make the investment today or to wait a year to find out about the FDA’s decision. If it waits a year,…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?
- Your latest project involves the development of a death ray. Initial estimates predict that the project has a 50% chance of failure, with a potential loss of $1,000,000. However, you could hire an expert for $450,000. This is likely to reduce the chance of failure to 20% and the potential loss to $300,000. Questions: a) What is the dollar value of the net benefit of hiring the expert? Should you hire the expert? (Show all calculations for credit) b) As the skeptical accountant, do you have any concerns with this analysis? Be specific in order to receive creditYou are the project manager for Becker Enterprises, LTD. and have been asked to analyze two alternatives for the company’s newest plastics The two alternatives, A and B, will perform the same task, but Alternative A will cost $80,000 to purchase while Alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after-tax costs for the two projects are as follows: Year A B 0 $(80,000) $(55,000) 1 (20,000) (6,000) 2 (20,000) (6,000) 3 (20,000) (6,000) 4 (20,000) 5 (20,000) 6 (20,000) 7 (20,000) Calculate each project’s EAC, given a 10% discount Which of the alternatives do you think the company should select and why?Your company plans to invest in a particular project. There is a 40% chance you will lose $3,000, a 45% chance you will break even, and a 15% chance you will make $5,500. Based solely on this information, what should you do?
- Arrow Electronics is considering Projects S and L, which are mutually exclusive, equally risky, and not repeatable. Project S has an initial cost of $1 million and cash inflows of $370.000 for 4 years, while Project L has an initial cost of $2 million and cash inflows of $720, 000 for 4 years. The CEO wants to use the IRR criterion. while the CFO favors the NPV method, using a WACC of 6.67%.Mrs. Bean is considering adding a machine to her operation. The machine she wants would cost $35,000, would be depreciated on a straight line basis over the 4-year life, and would have zero salvage value. Bean estimates the income from the machine would be $33,000 a year with $10,000 of that amount being variable cost. The fixed cost would be $5,000. Bean feels that the machine would net her, after costs, an additional $10,000 in revenue from her operation. The project will require $1,000 of net working capital which is recoverable at the end of the project. What is the net present value of this project at a discount rate 12% and a tax rate of 34%? a. $26,802.46 b. $29,603.82 c. $28,510.97 d. $27,390.19 e. $23,487.72Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that there is a probability of 0.4 that the ATR Co. will come out with a competitive product. If Weiss adds an assembly line for the product and ATR Co does not follow with a competitive product, Weiss's expected profit is $40,000, if Weiss adds an assembly line and ATR follows suit, Weiss still expects $10,000 profit. If Weiss adds a new plant addition and ATR does not produce a competitive product, Weiss expects a profit of $600,000, if ATR does compete for this market, Weiss expects a loss of $100,000 a) Determine the EMV of each decision. b) Compute the expected value of perfect information.
- Imagine that you are a financial investor and Boyan Slat of Ocean Clean-up. Comes to you for an investment in his project to filter plastic remains from the world oceans. He presents that his project only requires $20 million in funding; that it will help to reduce damage to the delicate eco-systems of the world oceans and that the reduction of this damage would avoid an otherwise necessary clean-up cost $2 billion in expenses. Therefore, he argues, the investment offers a return of 1000%. Would you invest? Why/why not?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.Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?