UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 7, Problem 18QP
a.
Summary Introduction
To identify: The project NPV.
It refers to the value of an amount today after considering the
Capital Budgeting:
The decision-related to the investment for long run is called capital budgeting. Capital budgeting includes the investment in the heavy machinery and information technology.
The net present value is a differential amount of the net
b.
Summary Introduction
To identify: The value of option to abandon.
Present Value:
It refers to the value of an amount today after considering the time value of money and the discounted rate. In other words it is discounted value of the amount to be received in future.
Capital Budgeting:
The decision-related to the investment for long run is called capital budgeting. Capital budgeting includes the investment in the heavy machinery and information technology.
Net Present Value (NPV):
The net present value is a differential amount of the net cash inflow from future investments and net cash outflow in the form of cost that the company has to pay at present as initial cost of the investment.
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In a few sentences, answer the following question as completely as you can.
According to your textbook, “an investment should be accepted if the net present value is positive and rejected if it is negative” (p. 239). What does an NPV of zero mean?If you were a financial decision maker facing a project with NPV of zero (or close to zero) what would you do? Can you think of any other factors that might influence your decision?
Suppose that you found the probabilities and expected NPVs of 3 scenarios for a timing option:
E(NPV) probability
$0.15 0.30
$10.35 0.50
$42 0.20
1. What is the expected NPV of the timing option? Show your work.
2. Suppose, that the expected NPV of the project if proceeding today is $14. Should the project be delayed based on your finding in part 1 or should the management implement it today? Briefly explain.
(a) If you apply the payback decision rule, which investment will you choose? Why?
(b) If you apply the NPV decision rule, which investment will you choose? Why?
(c) If you apply the IRR decision rule, which investment will you choose? Why?
(d) Based on your answers of (a) to (c), which project will you (eventually) choose? Why?
Chapter 7 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
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. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Decision Trees Ang Electronics. Inc., has...Ch. 7 - Decision Trees The manager for a growing firm is...Ch. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Financial Break-Even Niko has purchased a brand...Ch. 7 - Prob. 11QPCh. 7 - Prob. 12QPCh. 7 - Project Analysis You are considering a new product...Ch. 7 - Project Analysis McGilla Golf has decided to sell...Ch. 7 - Prob. 17QPCh. 7 - Prob. 18QPCh. 7 - Prob. 19QPCh. 7 - Prob. 20QPCh. 7 - Prob. 21QPCh. 7 - Option to Wait Hickock Mining is evaluating when...Ch. 7 - Abandonment Decisions Allied Products, Inc., is...Ch. 7 - Prob. 24QPCh. 7 - Scenario Analysis You are the financial analyst...Ch. 7 - Scenario Analysis Consider a project to supply...Ch. 7 - Sensitivity Analysis In Problem 26, suppose youre...Ch. 7 - Prob. 28QPCh. 7 - Prob. 29QPCh. 7 - Financial Break-Even The Cornchopper Company is...
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