John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?

John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. (a) Determine the value of the firm. (b) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000? (15) (10) Note: Show your answers in tables and all calculations properly presented.
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
Suppose an investor is interested in purchasing the following income producing property at a current market price of $ 1,490,000. The prospective buyer has estimated the expected cash flows over the next five years to be as follows: Year 1 = $88,000, Year 2 = $90,662, Year 3 = $91,923, Year 4 = $95,778, Year 5 = $97,000. Assuming that the required rate of return is 15% and the estimated proceeds from selling the property at the end of year five is $1,860,000, what is the NPV of the project? What is the IRR of the project?
The Hamilton company wants to acquire another company at a cost of $10,000. The new company will add cash flows of $2,000 in year 1, $4,000 in year 2, $3,000 in year 3, $3,000 in year 4 and $4,000 in year 5. Assuming Hamilton has a discount rate of 10% and a payback requirement of 3.75 years, should the company do the investment according to simple payback and IRR?
As corporate manager for acquisitions, your group is assessing a project that is expected to produce cash flows of $750 at the end of year 1, $1,000 at the end of year 2, $850 at the end of year 3, and $2,000 at the end of Year 4. If the firm requires a minimum IRR or "hurdle rate" of 10% for these types of investments, what is most you should pay for this project? Your answer should be between 2738.00 and 4355.00, rounded to 2 decimal places, with no special characters.
The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 is = -$100 Period 1 is =$80 Period 2 is = $80 If the company waits a year, it can make the following investment: Period 1 is = -2 $220 Period = $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.
Imagineering, Inc., is considering an investment in CADCAM compatible design software with the cash flow profile shown in the table below. Imagineering’s MARR is 18%/year. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Imagineering invest?
Your firm is considering a number of mutually exclusive choices for a property that you recently acquired. The following are the projected cash flows for one of the projects over its seven-year life. Cash Flows 0 1 2 3 4 5 6 7 (600,000) 100,000 120,000 140,000 160,000 180,000 200,000 220,000 If the appropriate discount rate is 12%, what is the annualized Net Present Value for this option? (Do not round intermediate calculations and enter your answer in dollars with-no decimal places, e.g., 24316.)
Jupiter is considering investing time and administrative expense on an effort that promises one large payoff in the future, followed by additional expenses over a 10-year horizon. The cash flow profile is shown in the table below. Jupiter’s MARR is 12%/year. Solve, a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Jupiter invest?
Wansley Lumber is considering the purchase of a paper company which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 16%. a. Should Wansley purchase the paper company? -Select- V b. Wansley realizes that the cash flows in Years 1 to 20 might be $27 million per year or $53 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 16%. -Select- V c. Wansley can wait for 1 year and find out whether the cash flows will be $27 million per year or $53 million per year before…
As corporate manager for acquisitions, your group is assessing a project that is expected to produce cash flows of $750 at the end year 1, $1,000 at the end of year 2, $850 at the end of year 3, and $2,900 at the end of year 4. If the firm requires a minimum IRR or "hurdle rate" of 10% for these types of investments, what is most you should pay for this project?Your answer should be between 2738.00 and 4355.00 rounded to 2 decimal places, with no special characters.