PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 22PS
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To discuss: Two descriptions of identical payoffs, given optimal exercise strategies.
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Santos Company needs a new cutting machine. The company is considering two machines: machine X and machine Y. Machine A costs$18,000, has a useful life of ten years, and will reduce operating costs by $7,000 per year. Machine B costs only $12,500, will also reduceoperating costs by $3,500 per year, but has a useful life of only five years.The payback period formula is = Investment required / Annual Net Cash Inflow
Which machine should be purchased according to the payback method?
a)Machine Xb) none of the abovec) Machine Yd) Both have the same payback period
A new manufacturing facility will produce two products, each of which requires a drilling operation during processing. Two alternative types of drilling machines (D1 and D2) are being considered for purchase. One of these machines must be selected. For the same annual demand, the annual production requirements (machine hours) and the annual operating expenses (per machine) are listed in the shown Table. Which machine should be selected if the MARR is 15% per year? Show all your work to support your recommendation. Assumptions: The facility will operate 2,000 hours per year. Machine availability is 80% for Machine D1 and 75% for Machine D2. The yield of D1 is 90%, and the yield of D2 is 80%. Annual operating expenses are based on an assumed operation of 2,000 hours per year, and workers are paid during any idle time of Machine D1 or Machine D2. State any other assumptions needed to solve the problem.
Use Expected NPV and PVR analysis for a minimum rate of return of 20.0%to evaluate the economic potential of buying and developing the rights to a new process with the following estimated costs, revenues, and success probabilities. The process rights would cost $100,000 at time zero, and it is considered 100% certain that an experimental development pilot plan work will be done one year later for a cost of $500,000. There is a 60.0% probability that the experimental development results will look good enough to take the project to production for a $400,000 capital cost at year one. If the experimental development results are unsatisfactory, a pilot plan abandonment cost of $40,000 will be incurred at year 1. If the project is taken to production, it is estimated there will be a 50.0% probability of generating production that will give $450,000 peryear net positive cash flow for years 2 through 10, a 35.0% probability of generating $300,000 per year net positive cash flow for years 2…
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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