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- Assume you own a professional sports team and are considering hiring a new coach who is famous for her one-of-a-kind risky strategy/style. If the risky coach’s strategy works (probability = 60%), FCFs will be $3 million higher than their usual level each year she’s the coach. If the risky coach’s strategy fails (probability = 40%), FCFs will be $1 million lower than usual while she’s the coach. Also, if the coach’s strategy works/fails in year 1, it does the same in year 2, and no matter what, the coach is going to retire at the end of year 2. As soon as the risky coach retires (or is fired), FCFs return to their usual level. You are considering offering the coach two different 2-year contracts: Deal A states that you can fire her after year 1 with no penalty, and Deal B states that you can’t fire her after year 1 no matter what (imagine there is a $100 million penalty for doing so). Assume you have to make contract offers that pay the coach her full expected value (given the contract…The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Consider Decision Tree Analysis If the owner is optimistic about the company's future sales, should the company expand by purchasing the equipment? Is the owner's optimism or pessimism about sales the only factor that may impact the company's profits?Dawn is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $13,000 of her own funds, which currently generate a return of 4% per year. The remainder of financing will be provided by a $9,000 bank loan carrying a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of inflation and risk should also be considered. Her decision is to add another 1.5% per year to compensate for these elements. What is the MARR she should use when evaluating projects? the Marr she should use is __%
- Boyd Enterprises is considering developing a new baseball souvenir for use in the new baseball stadium. It is very big, very bright, and very noisy! Boyd will immediately spend $50,000 on a design and test marketing study that will take a year to complete. If the fan focus groups hate it (30% probability) Boyd will abandon the project and receive nothing. If they love it (70% probability) then in Year 1 Boyd will invest $30,000 in new manufacturing equipment. Sales will begin in Year 2. If actual fans in the stadium love it (80% probability), Boyd will receive cash flows of $40,000 per year for 5 years starting in Year 2. If fans don't like them (20% probability) Boyd will only receive cash flows of $2,000 per year for 5 years. What is the expected NPV of the project? Boyd's WACC is 10%. Hint: Draw a decision tree. $9,068.22 $9,975.04 $10,972.55 $12,069.80 $13,276.78ABC Co is considering the launch of a new widget. If the product goes directly to the market, there is a 40% chance of success. For $250,000, the manager can conduct a focus group to increase the probability of success to 60%. Alternatively, the manager can pay a consulting firm $4,000,000 to research the market and refine the product. The consulting firm successfully launches new products 80% of the time. If the firm successfully launches the widget, the payoff will be $20 million. If the product is a failure, the NPV is $0. Based on your analysis, ABC should: a. take the product directly to market b. hire the consulting firm c. conduct a focus groupA) Rick is thinking about quitting his current job, which pays a salary of $54,000 per year, to own and operate his own business. If he starts the business, he expects to spend $230,000 to purchase physical capital. This amount of money would come from two sources: $110,000 from a bank loan at an interest rate of 7% per year and $120,000 from Rick's savings, which are currently invested in stocks that are equally risky as his intended business and earning 11% per year. The physical capital is expected to have useful life of 10 years and a scrap value of $25,000. Rick expects to spend $130,000 per year on assistants and to pay himself a salary of $23,000 per year while operating his business. His business is expected to earn total revenues of $260,000. After learning that Rick might quit, his employer offers him a salary of $62,000 per year to convince him to stay at his current job. The expected annual accounting profit of Rick's intended business is $__________ B) Rick is thinking…
- The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low. Consider Decision Tree Analysis Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business? The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?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 work in a Finance department and are asked to analyze the economics of an existing jet, which would be retired in four years. A new jet is purchased each time a jet is retired because the CEO travels regularly. If other managers use the existing jet, the company would save $1,000,000 each year on commercial airline flights, however, operating costs (e.g. fuel, maintenance) for the existing jet would be $700,000 greater each year, and the jet would need to be replaced at the end of three years instead of four. Assume the company does not pay taxes. The opportunity cost of capital is 9%. Assume a new jet costs $10 million and has a life of ten years. Assume GE would not allow other managers to use a new jet. Question: Should the company allow other officers to use the existing jet (i.e. allow managers to use the existing jet for three years, but not use the new jet)?
- Bill Anders is considering investing in a franchise in a fast-food chain. He would have to purchase equipment costing $420,000 to equip the outlet and invest an additional $30,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $120,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr. Anders’ required rate of return is 8%. (Ignore income taxes) What is the investment's net present value? Is this an acceptable investment?Ali is an intelligent business woman. She makes her investments after a very thoughtful process. In January 2018, her manager has shown her some projects with the following details Option A Investment into a towel business that initially cost $100,000 and then will generate cash inflow of $14000 per year for the next 10 years Option B Investment into a detergent business that initially cost $90,000 and then will generate cash inflow of $10,000 for each of next 12 years. The rate of return associated with both the investments is 11%. Calculate net present value (NPV) and internal rate of return (IRR) of both the investments. Comment on which investment Mrs Alis should pick on the basis NPV and IRR.You have recently completed your training contract and managed to save a small amount of money during the three years of your contract. You are thinking about investing the money and are considering investment opportunities which would maximize your return. A friend of yours has recently received a ‘hot tip’ from his uncle for HiFly Ltd, a share on the JSE, which is currently providing high returns. You are looking at investing 40% of your money in HiFly Ltd and the balance in Treasury Bills. The average rate of return on Treasury Bills next year will be 9%. You have been provided with the following relevant information: (Information attached in image below) ROUND ALL ANSWERS TO TWO DECIMAL PLACES REQUIRED: Calculate the expected return of HiFly Ltd. Answer% Calculate the expected return of the market. Answer% Calculate the standard deviation of HiFly Ltd. Answer% Calculate the standard deviation of the market. Answer% Calculate the covariance of returns between the market and HiFly…
