   Chapter 13, Problem 8SP Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

REAL OPTIONS Use a spreadsheet model to evaluate the project analyzed in problem 13-7.

a.

Summary Introduction

To determine: The expected NPV of the project when the tax is imposed.

Introduction:

Net present value (NPV) is the variation between the present value of the cash outflows and the present value of the cash inflows. In capital budgeting, the NPV is utilized to analyze the profitability of a project or investment.

Explanation

Given information:

B Company has decided to buy a vacant lot, which is sold for $1,400,000. The company has planned to purchase the property for$6,000,000. The expected cash flows will be $500,000 at the end of each of the next 15 years when the tax is imposed and the expected cash flows will be$1,200,000 when the tax is not imposed. The WACC is 12 percent.

Compute the NPV when the tax is imposed:

The table below shows the Excel formula to calculate the NPV:

Note: Refer the Pr...

b.

Summary Introduction

To determine: The expected NPV of the project when the tax is not imposed.

c.

Summary Introduction

To determine: The expected NPV of the project when the management of the company exceeds the project at the moment.

d.

Summary Introduction

To determine: Whether the existence of the abandonment option affects the decision of the company to proceed with the project.

e.

Summary Introduction

To determine: The amount that the company will pay at the moment.

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