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 25QP
Scenario Analysis You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate. Should you recommend the project?
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You are the financial analyst for furniture manufacturer. The company is considering using a certain new raw material in its furniture. The company has estimated the information in the following table about the market for a chair with the new material. The company expects to sell the chair for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate.
Pessimistic
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Optimistic
Market size
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150,000
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$150
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$2,000,000
Required:
Should you recommend the project?
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows:
Expected sales: 30,000 units per year
Unit price: $50
Variable cost: $30
Fixed cost: $300,000
The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project
life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%.
However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales
to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $40. The good
news is that fixed costs could be as low as $200,000, and variable costs would decline in proportion to sales.
a. What is project NPV if all variables are as expected?
Note: Do not round intermediate calculations. Enter your answer in thousands not in millions…
Applied Nanotech is thinking about introducing a new surface cleaning machine. The engineering department has come up with the estimate that developing the machine will take a $7.5 million initial investment. If unsuccessful, after the first year the project can be dismantled and will have an after tax salvage value of $3.5 million. If the risk-free rate is 4% and the volatility of the business is 40%, determine the value of the option to abandon. Determine whether the company should dismantle the project.
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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