Suppose an opportunity arises to invest $10 million that will pay $5.5 million at the end of year 1 and $6.5 million at the end of year two. The cost of capital is 10%. Find NPV. Is the project a go? Show and explainSuppose the project’s cash flows are delayed a year, but not the outlay. How does that change your answer? Show and explainSuppose there is a cost overrun of 20%. The cash flows and their timing are the same as in part a. How does this change your answer? Show and explain.Suppose the second-year cash flow decreases to $5 million. The outlay and timing of the cash flows are the same as in part a. How does this change your answer? Show and explain.Evaluate the proposal. Would you undertake it?

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 3MC: Tropical Sweets is considering a project that will cost $70 million and will generate expected cash...

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Suppose an opportunity arises to invest $10 million that will pay $5.5 million at the end of year 1 and $6.5 million at the end of year two. The cost of capital is 10%.

Find NPV. Is the project a go? Show and explain
Suppose the project’s cash flows are delayed a year, but not the outlay. How does that change your answer? Show and explain
Suppose there is a cost overrun of 20%. The cash flows and their timing are the same as in part a. How does this change your answer? Show and explain.
Suppose the second-year cash flow decreases to $5 million. The outlay and timing of the cash flows are the same as in part a. How does this change your answer? Show and explain.

Evaluate the proposal. Would you undertake it?

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