Question

Szek Inc. is evaluating a project in that would require a $5900 investment today (t = 0) in S. Dakota. The after-tax cash flows would depend on whether S. Dakota imposes a new property tax. There is a 50-50 chance that the tax will pass, in which case the project will produce after-tax cash flows of $1,350, at the end of each of the next 5 years. If the tax doesn't pass, the after-tax cash flows will be $1,800 for 5 years. The project has a WACC of 8.4%. The firm would have the option to abandon the project 1 year from now, and if it is abandoned, the firm would receive the expected $1350 cash flow at t = 1 and would also sell the property for $5500 at t = 1. If the project is abandoned, the company would receive no further cash inflows from it. What is the value of this abandonment option? What is the value of the project without the abandonment option? (Hint You have to calculate 4 NPVs)

Answer #1

Nippon Inc is considering a project that has an up-front cost of
$500,000. The project’s subsequent cash flows depend on whether its
products become the industry standard. There is a 60% chance that
products will become the industry standard, in which case the
project’s expected cash flows will be $120,000 per year for the
next 7 years. There is a 40% chance that products will not become
the industry standard, in which case the project’s expected cash
flows will be...

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...

Quantitative Problem
Sunshine Smoothies Company (SSC) manufactures and distributes
smoothies. It is considering the introduction of a “weight loss”
smoothie. The project would require a $2 million investment outlay
today (t = 0). The after-tax cash flows would depend on whether the
weight loss smoothie is well received by consumers. There is a 30%
chance that demand will be good, in which case the project will
produce after-tax cash flows of $1.5 million at the end of each of
the...

Sunshine Smoothies Company (SSC) manufactures and distributes
smoothies. It is considering the introduction of a “weight loss”
smoothie. The project would require a $5 million investment outlay
today (t = 0). The after-tax cash flows would depend on whether the
weight loss smoothie is well received by consumers. There is a 30%
chance that demand will be good, in which case the project will
produce after-tax cash flows of $1 million at the end of each of
the next 3...

A firm is considering a project with a 5-year life and an
initial cost of $1,000,000. The discount rate for the project is
9%. The firm expects to sell 2,500 units a year for the first 3
years. The after-tax cash flow per unit is $120. Beyond year 3,
there is a 50% chance that sales will fall to 400 units a year for
both years 4 and 5, and a 50% chance that sales will continue at
2,500 units...

Middlefield Motors is evaluating a project that would require an
initial investment of 79,077 dollars today. The project is expected
to produce annual cash flows of 7,471 dollars each year forever
with the first annual cash flow expected in 1 year. The NPV of the
project is 432 dollars. What is the IRR of the project? Answer as a
rate in decimal format so that 12.34% would be entered as .1234 and
0.98% would be entered as .0098.

Carlyle Inc. is considering two mutually exclusive projects.
Both require an initial investment of $15,000 at t = 0. Project S
has an expected life of 2 years with after-tax cash inflows of
$7,000 and $12,000 at the end of Years 1 and 2, respectively.
Project L has an expected life of 4 years with after-tax cash
inflows of $5,200 at the end of each of the next 4 years. Each
project has a WACC of 9.00%, and neither can...

A U.S. company is considering a project in Great Britain that
would require an investment today of 5 million Pounds. The project
would last 4 years and it would generate after-tax cash flows of
1.8 million Pounds per year. The company’s weighted average cost of
capital is 10% per year, the U.S. risk-free interest rate is 5% per
year, the British risk-free interest rate is 4% per year, and the
spot exchange rate is 0.57 British Pounds per U.S. dollar....

Fairfax Pizza is evaluating a project that would require an
initial investment in equipment of 300,000 dollars and that is
expected to last for 8 years. MACRS depreciation would be used
where the depreciation rates in years 1, 2, 3, and 4 are 39
percent, 31 percent, 20 percent, and 10 percent, respectively. For
each year of the project, Fairfax Pizza expects relevant,
incremental annual revenue associated with the project to be
345,000 dollars and relevant, incremental annual costs associated...

Fairfax Pizza is evaluating a project that would require an
initial investment in equipment of 400,000 dollars and that is
expected to last for 7 years. MACRS depreciation would be used
where the depreciation rates in years 1, 2, 3, and 4 are 45
percent, 33 percent, 16 percent, and 6 percent, respectively. For
each year of the project, Fairfax Pizza expects relevant,
incremental annual revenue associated with the project to be
628,000 dollars and relevant, incremental annual costs associated...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 12 minutes ago

asked 12 minutes ago

asked 14 minutes ago

asked 26 minutes ago

asked 46 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago