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- 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.An oil and gas company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 Billion dollars, and the company expects to earn $500 Millions in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100 Millions per year. The company requires a 17% return on its investments. Should it undertake the project? If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500 Millions in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.You are considering a new automotive product line in the firm’s business portfolio. The project will cost $ 2.170 billion and have a five-year life with no salvage value; depreciation is straight-line to zero. Sales are projected at 220 units per year; price per unit will be $ 19.70 million, variable cost per unit will be $ 12.80 million, and fixed costs will be $ 590.00 million per year. The required return on the project is 8%, and the relevant tax rate is 21%. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10%. What is the base-case NPV? What is the best-case NPV?What is the worst-case NPV?
- 1) Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier? 2) Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $200,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier?Ian Corp. is considering two expansion projects. The first project streamlines the company’s warehousing facilities. The second project automates inventory utilizing bar code scanners. Both projects generate positive NPV, yet Ian Corp. only chooses the bar coding project. Why? The payback is greater than the warehouse project’s life. The internal rate of return of the warehousing project is less than the company’s required rate of return for capital projects. The company is practicing capital rationing. All of the above are true.OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $6.0 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $820,000 per year in direct labor costs. The company requires a 12% return from its investments.1. Compute the proposed investment’s net present value.2. Using your answer from part 1, is the investment’s internal rate of return higher or lower than 12%?
- Ian Corp. is considering two expansion projects. The first project streamlines the company’s warehousing facilities. The second project automates inventory utilizing bar code scanners. Both projects generate positive NPV, yet Ian Corp. only chooses the bar coding project. Why? a. The payback is greater than the warehouse project’s life. b. The internal rate of return of the warehousing project is less than the company’s required rate of return for capital projects. c. The company is practicing capital rationing. d. All of the above are true.Investing 100,000 in additional raw materials, mostly palladium, should allow cryogenic concepts to increase production and earn an additional 112,000 next year. This payoff could cover the investment, plus a 12% return. Palladium is traded in commodity markets. The CFO has studied the history of returns from investments in palladium and believes that investors in the precious metal can reasonably expect a 15% return. what is the opportunity cost of capital? Is Cryogenic proposed investment in palladium a good idea? Why or why not?I believe the Opportunity cost of capital is 12% the minimum acceptable rate of return. I think that it would be a good deal because whether it's return on investment of 12 or 15% it's more than 100,000. However I'm confused by this question, the only example I got was in relation to whether a firm was reinvesting money or giving the money back to shareholders. In the example if the firm had reinvested money into their project it would have been a 20%…Finally, assume that the new product line isexpected to decrease sales of the firm’s otherlines by $50,000 per year. Should this be considered in the analysis? If so, how?
- OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $4 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $500,000 per year in direct labor costs. The company requires a 10% return from its investments. 1. Compute the proposed investment’s net present value. 2. Using your answer from part 1, is the investment’s internal rate of return higher or lower than 10%?Mosaic is evaluating a manufacturing plant that has the potential to generate revenue of $2 million per year. Based on uncertainty surrounding its long term government contract, next year’s revenue will either increase by 20% or decrease by 25%, with equal probability and then stay the same forever. Mosaic projected that the costs will be constant at $1.2 million per year. Next year, Mosaic has the option to sell the plant for $3 million. Its cost of capital is 20%. Assume a zero tax rate and perpetual cash flows.What is the value of the option to sell the plant? A. $0.5 million B. $0.75 million C. $1.25 million D. $1.5 millioninto.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $25 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 12% of the year’s projected sales; for example, NWC0 = 12%(Sales1 ). The servers would sell for $21,000 per unit, and Pinto believes that variable costs would amount to $15,000 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 2.5%. The company’s nonvariable costs would be $1.5 million at Year 1 and would increase with inflation. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project’s returns are expected to be highly correlated with returns on the firm’s other assets. The firm believes it could sell 2,000 units per year. The equipment would be depreciated over a…
