In: Finance

You are considering a project with an opportunity cost of 10% and that offers up the following two possible payouts based on your ability to market the product:

In the optimistic state you expect the following payouts, -$4,795, $8,000, $8,000. Based on your pessimistic expectations you expect the following -$4,795, -$500, -$10,000. The cash flows fall at time period 0, 1 and 2.

Your sense is that there is a 40% chance things will turn out well and a 60% chance things will turn out poorly. What is your expected NPV if you are able to abandon the project after year one?

a |
b |
a*b |
||||

Optimistic Cashflow |
Pessimistic Cashflow |
Probable cashflow (cashflow* probability) |
PV factor 10% [1/(1+r)]^n |
PV |
||

Probability |
40% |
60% |
||||

Year | ||||||

0 | (4,795.00) | (4,795.00) | (4,795.00) | 1.000 | (4,795.00) | |

1 | 8,000.00 | (500.00) | 2,900.00 | 0.909 | 2,636.36 | |

2 | 8,000.00 | (10,000.00) | (2,800.00) | 0.826 | (2,314.05) | |

Expected NPV of the project |
(4,472.69) |
|||||

Project should be abandoned after 1st year since expected
NPV is negative |
||||||

Notes: |
||||||

NPV = Discounted inflow - Initial investment | ||||||

Rate of return is 10% |

You are considering a project that offers up the following
possible payout with an opportunity cost of 20%.
Time 0 1 2
Base Case -$60,000 10,000 10,000
At the end of year two you know there is a 10% possiblity you
will buy out your competitor which has the potential to create
opportunities that are worth $1,028,231 at that time. How much
potential value is created or lost by taking on this project (i.e.
what is the NPV)?

A firm is considering an investment in a risky project that
offers a 10 percent rate of return. Alternative investments with
the same level of risk offer a 15% rate of return. If the company
makes the investment, their value will:
Options
increase.
increase, and then decrease.
stay the same.
It cannot be determined what will happen to the firm value.
decrease.

Calculate NPV for a project with a period of 10 years,
opportunity cost is 14%.
a. Initial investment USD 10,000 and cash inflows each year is
USD 2,000
b. Initial investment USD 25,000 and cash inflows each year is
USD 3,000
c. Initial investment USD 30,000 and cash inflows each year is
USD 5,000

You are considering a project which has a set up cost of $4,895,
and which yields $1,500, $2,000, and $2,500 at the end of the
first, second, and third years after set-up. What is the internal
rate of return on this project (Hint: trial and error)
a.
5%
b.
10%
c.
15%

You are considering a project which has a set up cost of $4,895,
and which yields $1,500, $2,000, and $2,500 at the end of the
first, second, and third years after set-up. What is the internal
rate of return on this project?
a.
5%
b.
10%
c.
15%
d.
None of these

Brown Grocery is considering a project that has an up-front cost of
$X. The project will generate a positive cash flow of $75,000 at
the end of each of the next 20 years. The project has a WACC of 10%
and an IRR of 12%. What is the project’s NPV?

A firm is considering the following projects. Its opportunity
cost of capital is 12%.
Project 0 1 2 3 4
A -8,500 +1,875 +1,875 +4,750 0
B -4,500 0 +4,500 +3,750 +4,750
C -8,500 +1,875 +1,875 +4,750 +8,500
1) What is the payback period on each project?
2) What is the discounted payback period on each project?

Firm C is considering a project with an up-front cost at t = 0
of $1500. (All dollars in this problem are in thousands.) The
project’s subsequent cash ﬂows are critically dependent on whether
a competitor’s product is approved by the Food and Drug
Administration (FDA). If the FDA rejects the competitive product,
C’s product will have high sales and cash ﬂows, but if the
competitive product is approved, that will negatively impact
company C. There is a 75% chance...

A company is considering a project that has an up-front cost
paid today at t = 0. The project will generate positive cash flows
of $50,175 a year at the end of each for the next 5 years. The
project’s NPV is $87,983 and the company’s return on the project is
8.3 percent. What is the project’s payback?

A company is considering a project that has an up-front cost
paid today at t = 0. The project will generate positive cash flows
of $59,529 a year at the end of each for the next 6 years. The
project’s NPV is $89,007 and the company’s return on the project is
9.3 percent. What is the project’s payback?

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