Concept explainers
a)
To determine:
Range of
Introduction:
Risk: The risk can be defined as the uncertainty attached to an event such as investment where there is some amount of risk associated to it as there can be either gain or loss.
Return: In financial context, return is seen as percentage that represents the profit in an investment.
b)
To determine:
Expected value of return.
Introduction:
Risk: The risk can be defined as the uncertainty attached to an event such as investment where there is some amount of risk associated to it as there can be either gain or loss.
Return: In financial context, return is seen as percentage that represents the profit in an investment.
c)
To discuss:
Risky purchase.
Introduction:
Risk: The risk can be defined as the uncertainty attached to an event such as investment where there is some amount of risk associated to it as there can be either gain or loss.
Return: In financial context, return is seen as percentage that represents the profit in an investment.
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
EBK PRINCIPLES OF MANAGERIAL FINANCE
- Q6) IBM networks want to modernize their networking system. Proposals have been received from two major software companies. The first proposal cost $6million but will raise the firm’s annual cash flows by $3million. The second proposal cost $7million and provides cash flow of $3.5million a year. Both projects have a life span of 3 years. Assuming that the cost of capital is 8%, which proposal may be recommended on the basis of Net Present Value criteria. Select one: a. Project B, NPV 1731290 b. Project A, NPV 20198 c. Project B, NPV 2019839 d. Project A, NPV 2019839arrow_forward2. A firm considers investing in a project. In Year 0 it needs to make an investment of $50,000. If it is expected to earn $50,000, $60,000, $70,000 in years 1,2,3 respectively, decide whether the firm should make the investment. Consider the required rate of return of 8%. You may use xis to make calculations. Make recommendations for both cases.arrow_forwardProject X (Videotapes of the Weather Report) ($10,000 investment) Project Y (Slow-Motion Replays of Commercials) ($30,000 investment) Year Cash Flow Year Cash Flow 1 $5,000 1 $15,000 2 3,000 8,000 ........ 3 4,000 9,000 4 3,600 4 11,000 .. Compute the payback period (PB), net present value (NPV), internal rate of return (IRR), profitability index (PI) and excess of IRR over k. Assume k at 10%. Decide on which Project will you choose and why?arrow_forward
- Hide student question Issue #11: Comparison of Returns on $200000 and 5.5% on$70,000 Investors, as reasonable economic creatures commit toinvestment portfolios with the expectation of earning valuable returns. Keon as a logical investor believes his investment should provide the best value of rewards and is considering which option to invest in. The expected returns should be something similar or equal to his historical gain of 9% per annum. If Keon should leave $70,000 in the safe investment , his only expected return will be $3,850 (70,000*5.5%) in nominal terms per annum. However, if he invests the $200,000 by going entrepreneurial, Keon can potentially make a significant gain as per below. Return on Investment (ROI) ROI = Net Income * 100 Cost of Investment Cost of investment = $200, 000 Cost of 1 Limousine = 80,000 Total Cost of Limousines = (80,000*4) = 320,000 Useful Life of 1 Limousine = 20 yrs Depreciation per year = 80,000 = 4,000 20…arrow_forwardFinance Your Case Study firm is considering whether to invest £5.8 Million in Year 0 to develop an IoT Router for which they expect Sales during Years 1 – 5. a) Investment Appraisal: examine the Net Present Value (NPV) for a new product investment at a 10% rate given that the firm expects annual Sales Revenues (in £) equal to five times 1700000 and a Profit Margin of 25% b) Project Sensitivity Analysis: critically examine the sensitivity of the project to sales erosion (of 10%, 20% and 30%) using project NPV (for the same 10% discount rate). c) Project Return: using the original sales revenue, increase the discount rate till you achieve a negative NPV and use this to establish the project IRR (Internal Rate of Return). I need part c , with graph. i solved the question.. but need to check my answersarrow_forward[EXCEL] Internal rate of return: Refer to Problem 4. What is the IRR that Franklin Mints management can expect on this project? please use excel. Problem 4: [EXCEL] Net present value: Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project?arrow_forward
- A company is thinking in investing in one of two potential new products for sale. The projections are as follows: year Revenue/cost £ (Product S) Revenue/cost £ (Product V) 0 (150,000) outlay (150,000) outlay 1 14000 15000 2 24000 25333 3 44000 52000 4 84000 63333 a) Calculate the IRR for Product V only using 1% and 17% to 2 d.p.b) Outline the advantages and disadvantages of the IRR and payback using appropriate academic sources.arrow_forwardCompany A investment into making computers Company A invests $1.5 Million to start production of comouters If there's high demand (20% prob) then Company A generates $300k in perpetuity If there's low demand (80% prob) then Company A generates $50k for 2 years, after these two years there's another chance of high or low demand; If there's high demand (30% prob) then Company A generates $300k in perpetuity If there's low demand (70% prob) then Company generates $50k in perpetuity annual RRR = 10%, CF occur end of yeard Company B offers to pay Company A $1million at the end of year 4, but if this option is taken, Company A will not receive CF generated in year 4. What is the value of the option?arrow_forwardCompany A investment into making computers Company A invests $1.5 Million to start production of comouters If there's high demand (20% prob) then Company A generates $300k in perpetuity If there's low demand (80% prob) then Company A generates $50k for 2 years, after these two years there's another chance of high or low demand; If there's high demand (30% prob) then Company A generates $300k in perpetuity If there's low demand (70% prob) then Company generates $50k in perpetuity Company A ReqRateReturn = 10% CashFlows occur at the end of year, except initial CF What is the NPV of this Investment for Company A?arrow_forward
- For each requirement, change the values of the given information as shown and keep all other original data the same. Then enter your updated final answers for each scenario. Scenario A: Future value to be received $ 10,000 Future date received 3 years Discount Rate 6% 10% 16% Scenario B: Annual Cash Receipt $ 5,000 Number of Years 6 years Discount Rate 6% 10% 16% Scenario C: Discount Rate 8% Investment Project Cash Flow Initial Investment $ (6,500) Year 1 $ 700 Year 2 $ 800 Year 3 $ 1,400 Year 4 $ 3,600 Year 5 $ 6,800 Required: a. A company is expecting to receive a lump sum of money at a future date from now. Using the PV formula in Excel, what is the Present Value of that money at three different rates? (Round your answers to 2 decimal places.)arrow_forwardHow much would you invest today in order to receive $30,000 in each of the following? (for further instructions on present value in Excel, see the Suggested Resources in the textbook: https://cnx.org/contents/kg0cimBs@14.13:bDQCmuJO@6/Suggested-Resources) a. 10 years at 9% b. 8 years at 12% c. 14 years at 15% d. 19 years at 18%arrow_forwardAssume that you are considering several 5-year projects that have varying risk levels. You normally adjust your required return upward by 2% for higher-than-average risk projects and down by 2% for lower-than-average risk projects. The required return for average risk projects is 12%. After evaluating the risk of the projects under consideration, you have the following information: Project A B C Initial Investment ($50,000) ($50,000) ($50,000) Cash flows for years 1–5 14,000 14,750 13,500 Risk Level Average Above Average Below Average Calculate the payback period, IRR, NPV, MIRR and PI for each project using risk-adjusted discount rates. If the projects are independent, which would you accept? If they are mutually exclusive, which would you accept? Draw NPV profile for Project A…arrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningFundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning