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Principles of Corporate Finance
- You are considering investing in a glove manufacturing plant for which you need to immediately pay RM10 million. You expect to produce and sell 10,000 gloves per year. Production commences after 12 months, i.e, at the end of year 1 (which is also the begining of Year 2). You expect production cost to be RM50 per glove. Selling price is estimated at RM100 per glove for the first three years of sales. You are not sure about the sales price after Year 3 because your exclusive patent right expired then. The plant facilities last for 8 years. Cost of capital is 8%. Compute the glove's sales price after Year 3. and this project's NPV Don't you think the price after year 3 is the same as the marginal cost, since at optimum level of output, marginal revenue=marginal cost?arrow_forwardSandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar denominated cash flows consist of initial investment of $2,000 and a cash inflow the year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 US dollar will buy 0.91 Swiss franc. In addition, 1 year risk free securities in the US are yielding 3% while similar securities in Switzerland are yielding 1.50% a) If this project was instead undertaken by a similar U.S. based company with the same risk-adjusted cost of capital what would be the net present value and rate of return generated by this project?arrow_forwardSpy Peripherals Incorporated (SPI) is considering introducing a new smartphone, to be called SPI Phone 96. The cost of bringing SPI Phone 96 to market is $150 million, but SPI expects the free cash flow from SPI Phone 96 to be $6 million in the first year and to grow at 4% per year thereafter. If SPI’s WACC is 7.5%, should it undertake the project?arrow_forward
- Micheal’s Machinery is a German multinational manufacturing company. Currently, Micheal’s financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2000 and a cash inflow the following year of $2400. Micheal’s estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.7 Germany. In addition, 1-year risk-free securities in the United States are yielding 6.5%, while similar securities in Germany’s are yielding 4.5%. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round your answers to two decimal places. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places. If Micheal undertakes the project, what is the net present value and rate of return of…arrow_forwardSandrine Machinery is a Swiss multinational manufacturingcompany. Currently, Sandrine’s financial planners are considering undertaking a 1-yearproject in the United States. The project’s expected dollar-denominated cash flows consistof an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrineestimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding3%, while similar securities in Switzerland are yielding 1.50%.a. If this project was instead undertaken by a similar U.S.-based company with the samerisk-adjusted cost of capital, what would be the net present value and rate of returngenerated by this project?b. What is the expected forward exchange rate 1 year from now?c. If Sandrine undertakes the project, what is the net present value and rate of return ofthe project for Sandrine?arrow_forwardOpenDoor Cafe is considering opening a new food court in a major US city. The initial investment is expected to be $11,550,000. The projected cash flows are $3,410,000 in years one and two, $2,220,000 in year three, $1,990,000 in year four, and $4,485,000 on year five. What is this project's internal rate of return? 18.03% 10.61% 12.70% 6.95%arrow_forward
- Hilton Hotels is very interested in developing a new hotel in Zambia. The company estimates that the hotel would need an initial investment of $20 million. Hilton Hotel expects the hotel will generate positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. i.What is the project's net present value? ii. Hilton Hotel expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Zambia government imposes a large hotel tax. One year from now, Hilton Hotel will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Hilton Hotel is deciding whether to proceed with the hotel today or to wait a year to find out…arrow_forwardYour firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States. The project involves selling widgets. It will last for 5 years with a required initial investment of $1,180,000. The project will generate after- tax cash flow of $349,200 every year for 5 years. At the end of the project, the equipment is projected to be sold for $190,000, leading to an additional cash flow at the end of year 5. The spot exchange rate is $1.50 €1.00. The cost of capital to the Irish firm for a domestic project of this risk is 8 percent. The U.S. inflation rate is 3 percent; the Irish inflation rate is 2 percent. (a) What is the equivalent $ cost of capital? (b) Determine the NPV of the project in $. (c) Calculate NPV in € assuming the PPP holds. (d) What would be the NPV in $ if the US inflation rate is 2% and Irish inflation rate is 3%? Please show your calculation for all the above questions. Otherwise the mark wouldn't be earned.arrow_forwardYou are examining a new project. You expect to sell 7,000 units per year at €60 net cash flow apiece for the next 10 years. The relevant discount rate is 16 per cent, and the initial investment required is €1,800,000. a. What is the base-case NPV? b. After the first year, the project can be dismantled and sold for €1,400,000. If expected sales are revised based on the first year’s performance, when would it make sense to abandon the investment? In other words, at what level of expected sales would it make sense to abandon the project? c. Explain how the €1,400,000 abandonment value can be viewed as the opportunity cost of keeping the project in one yeararrow_forward
- GE Marine Systems is planning to supply a Japanese shipbuilder with aero-derivative gas turbines to power 11DD-class destroyers for the Japanese Self-Defense Force. The buyer can pay the total contract price of $2,100,000 two years from now, when the turbines will be needed, or an equivalent amount now. At an interest rate of 10% per year, what is the equivalent amount now?arrow_forwardThe directors of EMY plc are currently considering an investment in a new production machinery to replace an existing one. The new machinery would produce goods more efficiently, leading to increased sales volume. The investment required will be GH¢1,150,000 payable at the start of the project. The alternative course of action would be to continue using the existing machinery for a further five years, at the end of which time it would have to be replaced. The following forecasts of sales and production volumes have been made: Sales in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 400,000 560,000 2 450,000 630,000 3 500,000 700,000 4 600,000 840,000 5 750,000 1,050,000 Production in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 420,000 564,000 2 435,000 637,000 3 505,000 695,000 4 610,000 840,000 5 730,000 1,044,000…arrow_forwardCaspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.74 million and create incremental cash flows of $595,753.00 each year for the next five years. The cost of capital is 10.94%. What is the internal rate of return for the J-Mix 2000?arrow_forward
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