International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Feldman Corp. is considering a new product that would require an investment of $8 million at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $3.4 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $1.85 million per year. There is a 65% probability that the market will be good. Foltz Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows—only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option?
a. $144,867.15
b. $269,039.00
c. $357,188.00
d. $413,906.15
e. $455,296.77
Jasper Corp. is considering the introduction of a new product that would require investments of $425,000, $200,000 and $160,000 at the end of each of the next three years, respectively. The annual profit expected from the new product is forecast to be $90,000 for Years 1 to 5, and $110,000 for Years 6 to 10. The company’s cost of capital is 6.5% compounded annually.a) What is the NPV of the proposed product? (Negative values should be indicated by a minus sign. Do not round your intermediate calculations. Round your final answer to 2 decimal places.)NPV $ b) Should Jasper Inc. introduce the new product?
Winters Corp. is considering a new product that would require an investment of $18 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $9 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market does not like the product, then the cash flows would be only $4 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak, but it would have to incur costs to obtain this timing option. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. The project's WACC is 11%. What is the value (in thousands) of the option to delay the project?
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- Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?arrow_forwardHemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway’s president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 – $5 – $20 = $34 million. Branch probabilities are also shown for the chance events. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? What must the selling price be for the company to consider selling the rights to the product? Develop a risk profile for the optimal strategy.arrow_forwardThe management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment: A. What is the payback period of this uneven cash flow? B. Does your answer change if year 10s cash inflow changes to $500,000?arrow_forward
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