Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 14, Problem 3MC
Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 million per year for 3 years. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. After discussions with the marketing department, you learn that there is a 30% chance of high demand with associated future cash flows of $45 million per year. There is also a 40% chance of average demand with cash flows of $30 million per year as well as a 30% chance of low demand with cash flows of only $15 million per year. What is the expected
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Students have asked these similar questions
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
You are considering opening a new plant. The plant will cost $98.52 million up front and will
take one year to build. After that, it is expected to produce profits of $30.46 million at the
end of every year of production. The cash flows are expected to last forever. Calculate the
NPV of this investment opportunity if your cost of capital is 8.25%. Should you make
the investment? Calculate the IRR and use it to determine the maximum deviation
allowable in the cost of capital estimate to leave the decision unchanged.
The NPV of the project will be $ million. (Round to two decimal places.)
A project that costs $1000 today is expected to have cash flows of $200/year for 10 years.
Under these projections, this is a positive NPV project: if your cost of capital is 10%/year, investing $1000 today and earning $200 per year for 10 years yields an NPV of $228.91 (you can verify this yourself, or take my word for it).
However, those annual cash flows of $200 are based on the following expectations:
A 50% probability that business will be good and the project will earn $300/year, and
a 50% probability that business will be bad and the project will earn $100/year.
(Note that the expected annual cash flows will be: [0.5 * $300] + [0.5 * $100] = $200/year, as stated above.)
Unfortunately, you will not know which state of the world you will be in until you spend the $1000 and start the business; in year 1, after the business opens, you will find out.
Obviously, if you open for business and business is good, you will want to stay open for the entire 10 years; if your cost of capital…
Chapter 14 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Prob. 3QCh. 14 - If a company has an option to abandon a project,...Ch. 14 - Investment Timing Option: Option Analysis
Rework...Ch. 14 - Prob. 7PCh. 14 - Prob. 1MCCh. 14 - What are five possible procedures for analyzing a...Ch. 14 - Tropical Sweets is considering a project that will...Ch. 14 - Prob. 4MC
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