You are evaluating a project that will cost $507,000, but is expected to produce cash flows of $129,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.)

You are evaluating a project that will cost $507,000, but is expected to produce cash flows of $129,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.)

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 4MC

See similar textbooks

Similar questions

Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
You are evaluating a project that will cost $502,000, but is expected to produce cash flows of $127,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 10.7% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.) b. Should you take the project if you want to increase the value of the company? (Select from the drop-down menus.) If you want to increase the value of the company you take the project since the NPV is will not will
You are evaluating a project that will cost $508,000, but is expected to produce cash flows of $126,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11.3% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.)
You are evaluating a project that will cost $474,000, but is expected to produce cash flows of $130,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11.5% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company?
You are evaluating a project that will cost $543,000, but is expected to produce cash flows of $127,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 10.9% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company?
3. You are evaluating a project that will cost $500,000, but is expected to produce cash flows of $125,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? *round to two decimal places*
You are considering opening a new plant. The plant will cost $100.7 million upfront and will take one year to build. After that, it is expected to produce profits of $28.6 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 6.3%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here is the cash flow timeline for this problem: Years 0 2 + 28.6 3 28.6 4 + 28.6 Cash Flow ($ million) - 100.7 Calculate the NPV of this investment opportunity if your cost of capital is 6.3%. The NPV of this investment opportunity is $ million. (Round to two decimal places.) Forever 28.6
You are considering opening a new plant. The plant will cost $95.1 million upfront and will take one year to build. After that, it is expected to produce profits of $29.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.4 %. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule?
You are considering opening a new plant. The plant will cost $95.3 million upfront and will take one year to build. After that, it is expected to produce profits of $30.9 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 6.9%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here is the cash flow timeline for this problem: Years 0 1 2 3 Cash Flow ($ million) - 95.3 Calculate the NPV of this investment opportunity if your cost of capital is 6.9%. 30.9 30.9 4 30.9 Forever 30.9
You are considering opening a new plant. The plant will cost $102.5 million upfront and will take one year to build. After that, it is expected to produce profits of $28.4 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 6.7%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here is the cash flow timeline for this problem: Years 0 Cash Flow ($ million) - 102.5 1 2 28.4 3 28.4 4 28.4 Forever 28.4