Concept explainers
Real Options Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now the company will know whether the new technology is accepted in the market. If the demand for the new filters is high, the
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Chapter 23 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
- A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment of $412,000, and the store expects a return of $100,000 in year one, $72000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?arrow_forwardBouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.arrow_forwardIf a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?arrow_forward
- Suppose that the firm Cherry Blossom has an orchard they are willing to sell today. The net annual returns to the orchard are expected to be $75,000 per year for the next 15 years. At the end of 15 years, it is expected that the land will sell for $45,000. Calculate the Market Value of the orchard if the market rate of return on comparable investments is 16% ? Suppose that you purchase a tractor for $170,000 and sell it in 10 years for $50,000. What is the annualized cost (capital recovery) if your required return on capital is 12%?arrow_forwardBig Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90000 and will generate net cash inflows of $21000 per year for 11 years. What is the internal rate of return? Should it be accepted? Why or why not?arrow_forwardFastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $176,000 per year. Once in production, the bike is expected to make $281,600 per year for 10 years. Assume the cost of capital is 10%. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? The present value of the costs is how much(Round to the nearestdollar.) By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) What is the NPV of the investment if the cost of capital is 15%? (Round to two decimal places) Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.arrow_forward
- FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 14%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.arrow_forwardFastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 14%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.arrow_forwardFastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $198,000 per year. Once in production, the bike is expected to make $316,800 per year for 10 years. Assume the cost of capital is 10%. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? (Round to the nearestdollar.) By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) 3. What is the NPV of the investment if the cost of capital is 15%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.arrow_forward
- Jamie Williams, the project manager of Arc Systems Ltd. is evaluating a proposal to install solarpanels on the roof of its factory. The panels will cost $150,000 per set. Depending on the price ofelectricity and the efficiency of the panels, the project will increase operating cash flows by either$50,000 per year or $75,000 per year. The useful life of the panels is 5 years. If early resultsindicate savings of $75,000 per year, four additional sets of panels will be installed immediatelyat the same cost with the same projected savings. The probability of either outcome is 50%. Usinga discount rate of 10%:Required:i. Compute the expected NPV of the project if the option to expand is NOT considered. ii. Compute the expected NPV of the project if the option to expand is considered. iii. Why is it important to consider real options in the capital budgeting process? GiveONE (1) specific example.arrow_forwardUse this information for this and the next 2 questions. HCB, Inc. is considering investing in a new 'We're # 1' foam hand cutting facility. If UT has a successful year, then demand will be high and cash flows will be $100,000 per year for 3 years starting in Year 1. If UT has a bad year, then demand will be low and cash flows will be $30,000 per year for 3 years starting in Year 1. The probability of UT having a good year and demand being high is 60% and the probability of a bad year and low demand is 40%. It will cost $150,000 to purchase the equipment. HCB's WACC is 10%. Calculate the expected NPV of this project. $26,412 $29,053 ***correct answer $31,959 $35,155 $38,670 If HCB waits a year to invest, it will know which demand scenario is going to occur and therefore which cash flows will occur. These cash flows will occur in Years 2, 3, and 4. HCB will only invest in Year 1 if it is optimal to do so. Use a decision tree to find the expected NPV of the project, which is an…arrow_forwardCaspian Sea Drinks is considering buying the J - Mix 2000. It will allow them to make and sell more product. The machine cost $1.92 million and create incremental cash flows of $582, 193.00 each year for the next five years. The cost of capital is 9.20 %. What is the profitability index for the J - Mix 2000?arrow_forward
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