1. Hiram Finnegan Inc. is considering a capital investment project. This project will cost $10 million...

1. Hiram Finnegan Inc. is considering a capital investment project. This project will cost $10 million today. Managers expect that net cash flows will be $15 million at the end of year 1 and $40 million at the end of year 2. After year 2, the project will be finished. The appropriate annual discount rate for projects of this risk is 12% per year. What is the net present value of this project? Should the firm accept this project? (Choose the best answer.)

A. $55.0 mil.; accept because NPV > 0.

B. $35.3 mil.; accept because NPV > 0.

C. -$10.0 mil.; reject because NPV < 0.

D. -$45.0 mil.; reject because NPV < 0.

E. $45.3 mil.; accept because NPV > 0.

2. Diane Badame, a financial analyst at Kaufman & Broad, a real estate firm, has been asked to make a recommendation about whether Kaufman & Broad should invest in a piece of land that would cost $85,000 in cash today. The investment rate of return on similar alternative investments is 10% per year, compounded annually. Diane estimates that the land can be sold next year for $91,000. Assuming that her forecast is correct, what should she recommend, and why?

Hint: this problem is implicitly a one-period NPV problem.

A. Do not buy the land, because its present value is $86,842.25, which is greater than the purchase price.

B. Do not buy the land, because its present value is $82,727.27, which is less than the price.

C. Buy the land, because it will be worth $6,000 more in one year’s time, so Kaufman & Broad can sell it for a profit.

D. Buy the land, because its present value is $82,727.27, which is a bargain compared to $85,000.

Solutions

Expert Solution

Ans 1
		i	ii	iii=i*ii
	year	Cash flow	PVIF @ 12%	present value
	0	-10	1.0000	(10.0)
	1	15	0.8929	13.4
	2	40	0.7972	31.9
				35.3
	NPV =	35.3	mil

	correct answer is option : B. $35.3 mil.; accept because NPV > 0.


Ans 2
	present value of land value after 1 year = 91000/1.1
				82727.27

	Present value of land after 1 year is lower than its curret value.
	therefore correct answer is option :
	B. Do not buy the land, because its present value is $82,727.27, which is less than the price.

jeff jeffy answered 2 months ago

Next > < Previous

Related Solutions

ABC Inc. is considering a project that will cost $60 million. The cost of capital for...

ABC Inc. is considering a project that will cost $60 million. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. The project will generate the following cash flows every year for the next two years. Assume 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...

Ella, Inc. is considering a new capital budgeting project (the “Investment”). The Investment will cost $102,030...

Ella, Inc. is considering a new capital budgeting project (the “Investment”). The Investment will cost $102,030 that must be invested today, and $105,000 that must be invested at the end of year one. The Investment will have the following net cash inflows at the end of each of the next three years. Year 1: $50,000; Year 2: $75,000; and Year 3: $100,000. The financial accounting net operating income for each of the next three years is as follows: Year 1:...

1) Garrett Inc WACC is 10% Garrett inc is considering a project that will cost the...

1) Garrett Inc WACC is 10% Garrett inc is considering a project that will cost the company $1M. the project will provide after tax cash flows for the next 5 years : Y1: $0 Y2: $400,000 Y3: $500,000 Y4: $300,000 Y5: $200,000 A) what is the IRR for Garrett’s project? B) what is the payback for the Garrett project? 2) what is the terminal value of the following asset: cost: $1,000,000 accumulated depreciation: $750,000 projected scrap value: $300,000 company tax...

Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is...

Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is $105,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $22,500, $25,800, $33,000, $45,936 and $58,500 respectively. Frieda has weighted average cost of capital equal to 24%. What is the NPV of undertaking this expansion project? That is, what is the...

Arden Corporation is considering an investment in a new project with an unlevered cost of capital...

Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 8.9 % . Arden's marginal corporate tax rate is 40 % , and its debt cost of capital is 5.2 % . a. Suppose Arden adjusts its debt continuously to maintain a constant debt-equity ratio of 0.5 . What is the appropriate WACC for the new project? b. Suppose Arden adjusts its debt once per year to maintain a constant debt-equity ratio of...

Arden Corporation is considering an investment in a new project with an unlevered cost of capital...

Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 9.2 %. Arden's marginal corporate tax rate is 36 %, and its debt cost of capital is 4.7 %. a. Suppose Arden adjusts its debt continuously to maintain a constant debt-equity ratio of 0.5. What is the appropriate WACC for the new project? b. Suppose Arden adjusts its debt once per year to maintain a constant debt-equity ratio of 0.5. What is the...

Consider a project that has a 10% cost of capital that requires an initial investment of...

Consider a project that has a 10% cost of capital that requires an initial investment of $10,000. The year 1 net cash inflow is $2,450; the year 2 net cash inflow is $2,850; the year 3 net cash inflow is $3,350; the year 4 net cash inflow is $3,750; and the year 5 net cash inflow is $5,250. What is the project's discounted payback? NPV? AND IRR?

The executives of Garner-Wagner Inc. are considering a project that will cost $85 million. The cost...

The executives of Garner-Wagner Inc. are considering a project that will cost $85 million. The cost of capital for this type of project is 10 percent and the risk-free rate is 5 percent. There is a 50 percent chance of high demand, with future cash flows of $50 million per year for 3 years. There is a 40 percent chance of average demand, with cash flows of $30 million per year for 3 years. If demand is low (a 10...

You are considering investment in a project which will cost $50 million which will be depreciated...

You are considering investment in a project which will cost $50 million which will be depreciated to 0 over the next 3 years. The project will generate revenues of $13 million per year for the next 6 years with no expenses (other than depreciation). The company’s cost is capital is 8% and the corporate tax rate is 40%. After the 6 years, the project ends. What is the NPV of the project?

A capital investment project has total installed cost of $25 million and a terminal value of...

A capital investment project has total installed cost of $25 million and a terminal value of $16 million at the end of its 10-year life. The project is expected to generate $5 million in net cash flows after tax each year. The firm’s marginal tax rate is 40 percent, and its cost of capital is 7 percent. Calculate the profitability index of this project.

Subjects