CNCT ACC CORPORATE FINANCE
12th Edition
ISBN: 9781264604081
Author: Ross
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 7, Problem 10CQ
Project Analysis You are discussing a project analysis with a coworker. The project involves real options, such as expanding the project if successful, or abandoning the project if it fails. Your coworker makes the following statement: “This analysis is ridiculous. We looked at expanding or abandoning the project in two years, but there are many other options we should consider. For example, we could expand in one year, and expand further in two years. Or we could expand in one year, and abandon the project in two years. There are too many options for us to examine. Because of this, anything this analysis would give us is worthless.” How would you evaluate this statement? Considering that with any capital budgeting project there are an infinite number of real options, when do you stop the option analysis on an individual project?
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Students have asked these similar questions
Would you accept a project where you had an initial investment of $10,000,000 but the NPV was only $10,000?
Group of answer choices
A. There is not enough information
B.Yes, because you will make the required return each year and the NPV in additional to the required return.
C. No, the NPV is too small for such a large initial investment
Your latest project involves the development of a death ray. Initial estimates predict that the project has a 50% chance of failure, with a potential loss of $1,000,000. However, you could hire an expert for $450,000. This is likely to reduce the chance of failure to 20% and the potential loss to $300,000.
Questions:
a) What is the dollar value of the net benefit of hiring the expert? Should you hire the expert? (Show all calculations for credit)
b) As the skeptical accountant, do you have any concerns with this analysis? Be specific in order to receive credit
If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? (Mote: Do not round
Intermediate calculations and round your answer to the nearest whole dollar.)
-$7,874
Ⓒ-$6,630
-$8,288
O-$9,531
St. Margaret Beer Co. has the option to delay starting this project for one year so that analysts can gather more information about whether demand
will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a
two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it.
What will be the expected NPV If St. Margaret Beer Co. delays starting the project? (Note: Do not round Intermediate calculations and round your
answer to the nearest whole dollar.)
$1,880
Ⓒ$1,410
What is the value of St. Margaret Beer Co's option to delay the start of the project? (Note: Do not round…
Chapter 7 Solutions
CNCT ACC CORPORATE FINANCE
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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