EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 9, Problem 34QP
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Consider the following project data. A marketing study that costs $200 will be conducted at t = 0. The best estimate now is that there is a 70 percent chance that the study will indicate potential and a 30 percent chance that it will not. If the study indicates potential, the firm will spend $500 at t = 1 to start production. If the firm starts production, the firm is confident that cash inflows will be $1,000 annually for two years (t=2 and 3). If the appropriate cost of capital is 10 percent, what is the project's expected NPV to the nearest dollar?
A) $1,300
B) $923
C) $646
D) $586
E) $446
Perform a financial analysis for an IT Project which requires an initial investment of $32,000, but it is expected to
generate revenues of $10,000, $20,000 and $15,000 for the first, second and third years respectively. The target rate
of return is 12%. Write the formula and calculate the Net Present Value (NPV). In addition, Justify your result.
(For this question Write the answer on the paper and take photo and upload OR Type in the MS Word document and upload the file)
You are responsible to manage an IS project with a 4-year horizon. The annal cost of the project is
estimated at $40,000 per year, and a one-time costs of $120,000. The annual monetary benefit of
the project is estimated at $96,000 per year with a discount rate of 6 percent.
a. Calculate the overall return on investment (ROI) of the project.
b. Perform a break-even analysis (BEA). At what year does break-even occur?
Chapter 9 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Ch. 9 - Prob. 1QPCh. 9 - Prob. 2QPCh. 9 - Prob. 3QPCh. 9 - Prob. 4QPCh. 9 - Prob. 5QPCh. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Prob. 8QPCh. 9 - Prob. 10QPCh. 9 - Prob. 12QP
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- FastTrack Bikes Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $184,000 per year. Once in production, the bike is expected to make $276,000 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity. Should the company make the investment? b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged (Hint: Use Excel to calculate the IRR.) c. Calculate the NPV of this investment opportunity assuming the cost of capital is 13%. Should the company make the investment given this new assumption? Note: Assume that all cash flows occur at the end of the appropriate year and that the the inflows do not start until year 7. a. Calculate the NPV of this investment opportunity. Should the company make the investment? The present value of the costs is $ (Round to the nearest dollar.)arrow_forwardSuppose we are asked to decide whether a new consumer product should be launched. Based on projected sales and costs, we expect that the cash flows over the five-year life of the project will be $2,000 in the first two years, $4,000 in the next two, and $5,000 in the last year. It will cost about $10,000 to begin production. We use a 10% discount rate to evaluate new products. a. Calculate the NPV of the project. b. Should we take the project?arrow_forwardBillabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt requires an initial investment of $ 15,333 and generates cash inflows of $ 7,000 per year for 4 years. Project Board Shorts requires an initial investment of $ 28,500 and produces cash inflows of $ 13,500 per year for 5 years.arrow_forward
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