Question

Garner-Wagner is considering investing in a project that requires an investment of $3,000,000. The project will...

  1. Garner-Wagner is considering investing in a project that requires an investment of $3,000,000. The project will generate a cash inflow of 500,000 per year for the next 5 years. The cost of capital is 10%. What is the project's net present value?
  1. If Garner-Wagner goes ahead with this project today, it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today, there is a 35% probability that the outlook will be favorable, in which case the future investment opportunity will have a positive net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable, in which case the future investment opportunity will have a negative net present value of -$6 million at t = 5. Garner-Wagner does not have to decide today whether it wants to pursue the additional opportunity. Instead, it can wait to see what the outlook is. However, the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project, after consideration of the potential future opportunity?

Please include calculations and formulas suing Excel to better understand the solution set.

Homework Answers

Answer #1

Solution:

Given Below Attchments:

**Please Do Like* Thank You**

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
Suppose you are a financial manager and you have the following investment opportunities: Project Investment (in...
Suppose you are a financial manager and you have the following investment opportunities: Project Investment (in $1,000) NPV (in $1,000) 1 500 100 2 200 -4 3 125 -7 4 50 50 5 250 60 Which of the following projects should you pursue if you have only $700,000 allocated for capital expenditures? How much does the budget limit cost the company in terms of forgone NPV? The opportunity cost of capital for each project is 15%.
Cogswell Inc. is considering launching a major R&D project that will cost $5 million or do...
Cogswell Inc. is considering launching a major R&D project that will cost $5 million or do not start the project. The probability of project success is estimated at 50%. If successful the company need to decide to sell the rights for $25 million or invest an additional $20 million to build a facility for production. If not successful,   they just stop the project. If they decide to build a facility for production, the net present value (NPV) of the profit...
Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of...
Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of $122,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,700, and annual cash outflows would increase by $39,000. The company’s required rate of return is 12%. Click here to view PV table. Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding...
A firm is considering investing in a 15-year capital budgeting project with a net investment of...
A firm is considering investing in a 15-year capital budgeting project with a net investment of $14 million. The project is expected to generate annual net cash flows each year of $2 million and a terminal value at the end of the project of $10 million. The firm’s cost of capital is 9 percent and marginal tax rate is 40%. What is the profitability index of this investment? 0.35 0.78 2.86 1.54 1.35
Valotta Corporation has provided the following data concerning an investment project that it is considering: The...
Valotta Corporation has provided the following data concerning an investment project that it is considering: The working capital would be released for use elsewhere at the end of the project. Initial investment $690,000 Working capital $70,000 Annual cash flow $283,000 per year Salvage value at the end of the project $21,000 Expected life of the project 4 years Discount rate 11% Required: Calculate the net present value of the project and decide whether or not the company should make this...
A project requires an initial investment in equipment and machinery of $10 million. The equipment is...
A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a five-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the five years and have operating expenses (not including depreciation) amounting to one-third of revenues. Assume the tax rate is 40% and the cost of capital is 10%. What is the net present...
Hewlett Packard is considering an investment project to make a portable printer. Suppose the project requires...
Hewlett Packard is considering an investment project to make a portable printer. Suppose the project requires initial investment of $100,000. The company uses 14% after tax required rate of return. Fixed cash outlays are $30,000 a year. The company expects the printer will sell for $80 per unit and the variable cost to build a printer will be 25 percent of sales. The company does its analysis based on a 10-year project life. The salvage value of the project is...
What is the net present value of a project that requires a $2,000 investment today and...
What is the net present value of a project that requires a $2,000 investment today and returns $800 at the end of the first year and $1,700 at the end of the second year? Assume a discount rate of 10%
A company is considering investing in a project. The present value (PV) of future discounted expected...
A company is considering investing in a project. The present value (PV) of future discounted expected cash flows is either 7000 if the market goes up or 3000 if the market goes down next year. The probability the market will go up is 35%. The initial capital investment required at time 0 is 4000. Suppose the company has some flexibility in managing this project. If, however, the market should go up, the company could expand operations. With expansion the PV...
You are considering Project B that requires an initial investment of $70. The current present value...
You are considering Project B that requires an initial investment of $70. The current present value of its cash flows is estimated to be $100 based on today’s market conditions. You can undertake Project B now or wait for one month to decide. The current risk-free rate is 0.25%, and the standard deviation of project return is 10%. What should you do? Suppose instead that the initial investment for Project B is $100, the current present value of its cash...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT