Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781337587563
Author: MOYER, R. Charles; McGuigan, James R.; Rao, Ramesh P.
Publisher: Cengage Learning
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Chapter 11, Problem 12P
a)
Summary Introduction
To determine: The probability that the project have a negative
b)
Summary Introduction
To determine: The probability that the project have a NPV greater than $2.2 million.
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Huang Industries is considering a proposed project whose estimatedNPV is $12 million. This estimate assumes that economic conditions will be “average.”However, the CFO realizes that conditions could be better or worse, so she performed ascenario analysis and obtained these results:
Calculate the project’s expected NPV, standard deviation, and coefficient of variation.
Consider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and
have expected NPVS of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below.
Risk Measure
Standard deviation of project's expected NPVS
Project beta
Correlation coefficient of project cash flows (relative to the firm's existing projects)
Which of the following statements about these projects' risk is correct? Check all that apply.
Project B has more stand-alone risk than Project A.
Project A has more corporate risk than Project B.
Project A
$80,000
1.2
0.7
Project B has more corporate risk than Project A.
Project A has more market risk than Project B.
Project B
$40,000
1.0
0.9
Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:
Project X
Project Y
Expected NPV
$500,000
$500,000
Standard deviation (sNPV)
$200,000
$250,000
Project beta (vs. market)
1.4
0.8
Correlation of the project cash flows with cash flows from currently existing projects. Project X’s cash flows are not correlated with the cash flows from existing projects. Project Y’s cash flows are highly correlated with the cash flows from existing projects.Which of the following statements is CORRECT?
Group of answer choices
Project X has more corporate (or within-firm) risk than Project Y.
Project X has less market risk than Project Y.
Project X has more market risk than Project Y.
Project…
Chapter 11 Solutions
Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 11 - Prob. 1QTDCh. 11 - Prob. 2QTDCh. 11 - Prob. 3QTDCh. 11 - Prob. 4QTDCh. 11 - Prob. 5QTDCh. 11 - Prob. 6QTDCh. 11 - Prob. 7QTDCh. 11 - Prob. 8QTDCh. 11 - Prob. 9QTDCh. 11 - Prob. 10QTD
Ch. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 15PCh. 11 - Prob. 16PCh. 11 - Prob. 17PCh. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Prob. 28PCh. 11 - Prob. 29P
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- Suppose the MARR is 10% with probability 0.25, 12% with probability 0.50, and 15% with probability 0.25; what is the probability that Alternative A is the most economic alternative? Two investment alternatives are being considered. Alternative A requires an initial investment of $15,000 in equipment; annual operating and maintenance costs are anticipated to be normally distributed, with a mean of $5,000 and a standard deviation of $500; the terminal salvage value at the end of the 8-year planning horizon is anticipated to be normally distributed, with a mean of $2,000 and a standard deviation of $800. Alternative B requires endof-year annual expenditures over the planning horizon. The annual expenditure will be normally distributed, with a mean of $8,000 and a standard deviation of $750. Using a MARR of 15%, what is the probability that Alternative A is the most economic alternative?arrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $400,000 and has a present value of cash flows of $1,100,000. Project 2 requires an initial investment of $4,000,000 and has a present value of cash flows of $6,000,000. 1. Compute the profitability index for each project. 2. Based on the profitability index, which project should the company prefer? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the profitability index for each project. Project 1 Project 2 Choose Numerator: Profitability Index T 7 Choose Denominator: 4 of 5 180 # Next > G Oarrow_forwardThe net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $475,000 Year 3 $500,000 Year 4 $400,000 Hungry Whale Electronics’s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? $344,489 $844,489 $1,319,489 $971,162 Making the accept or reject decision Hungry Whale Electronics’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.…arrow_forward
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