Question

The San Diego LLC is considering a three-year project, Project A, involving an initial investment of...

The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities: Year 0 Year 1 Year 2 Year 3 Probability Cash Flow ($ mil.) Probability Cash Flow ($mil.) Probability Cash Flow ($ mil.) 0.2 50 0.1 60 0.3 70 0.3 40 0.2 50 0.4 60 0.4 30 0.3 40 0.1 50 0.1 20 0.4 30 0.2 40 Initial Investment $80 mil. Discount Rate 8% Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points: Describe and calculate Project A’s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC’s decision regarding this project? Describe your answer. The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain. Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A firm is considering a three-year project that will require an initial investment of $100 million....
A firm is considering a three-year project that will require an initial investment of $100 million. The success of the project depends largely on the future state of the economy. If the economy turns out to be “average,” the project will generate annual cash flows of $50 million during Years 1 through 3. If the economy “booms,” the project will generate annual cash flows of $80 million in Years 1 through 3. If the economy goes into “recession,” the project...
Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and...
Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years. There is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability...
Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and...
Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years. There is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be an investment of $50 million. The project is expected to generate a project cash flow of $5 million for year 1, and the firm expects project cash flows to increase by 4% per year over the life of the project. The project will run for 20 years, and the firm has a cost of capital of 11%. What is the NPV of this proposed...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.41 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,775,000 in annual sales, with costs of $672,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $375,000 at the end of the project.    a. If the tax...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,790,000 in annual sales, with costs of $684,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project.    a.   If the tax...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be an investment of $50 million. The project is expected to generate a project cash flow of $6 million for year 1, and the firm expects project cash flows to increase by 4% per year over the life of the project. The project will run for 20 years, and the firm has a cost of capital of 12%. What is the NPV of this proposed...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 at the end...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment...
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,805,000 in annual sales, with costs of $696,000. The project requires an initial investment in net working capital of $440,000, and the fixed asset will have a market value of $465,000 at the end of the project.    a. If the tax...
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial...
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $7,000 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,750 0.2 $          0   0.6   7,000 0.6 7,000   0.2   7,250 0.2 17,000   BPC has decided to evaluate the riskier project at 11% and the...