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Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the racquets. This method will produce a $24M cashflow next year. The firm could also choose a new experimental method for producing racquets. This method has lower costs if it works. If the new technology works it will produce a cashflow of $28M next year. If it is unsuccessful it will produce a zero cashflow next year. The probability of success is 0.8 and the cashflows are uncorrelated with the market return. Both methods require a $20M dollar investment today. There are no cashflows after next year. The risk-free rate is 10%. The market price of risk is 8.4%.
(a) What is the NPV of the two projects? Which project should an all equity firm choose? Hint. You will have to determine the discount rate for both technologies [5 Marks]
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a
proven technology to produce the racquets. This method will produce
a $24M cashflow next year. The firm could also choose a new
experimental method for producing racquets. This method has lower
costs if it works. If the new technology works it will produce a
cashflow of $28M next year. If it is unsuccessful it will produce a
zero cashflow next year. The probability of success is 0.8 and the...
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a
proven technology to produce the racquets. This method will produce
a $24M cashflow next year. The firm could also choose a new
experimental method for producing racquets. This method has lower
costs if it works. If the new technology works it will produce a
cashflow of $28M next year. If it is unsuccessful it will produce a
zero cashflow next year. The probability of success is 0.8 and the...
Sportway Inc. produces high-quality tennis racquets and golf clubs using a patented forming process and high-quality...
Sportway Inc. produces high-quality tennis racquets and golf
clubs using a patented forming process and high-quality
hand-finishing. Products move through two production departments:
Forming and Finishing. The company uses departmental overhead rates
to allocate overhead costs. Overhead is allocated based on
machine-hours in Forming and direct labour cost in Finishing.
Information related to estimated volumes and denominator values for
the coming year are provided below:
Tennis Racquets
Golf Clubs
Annual production and sales
5,200
8,300
Direct materials per unit
$...
Luke Athletics Inc has purchased a $200,000 machine to produce tennis balls. The machine will be...
Luke Athletics Inc has purchased a $200,000 machine to produce
tennis balls. The machine will be fully depreciated by the
straight-line method for its economic life of five years and will
be worthless after its life. The firm expects that the sales price
of the toy is $25 while its variable cost is $5. The firm should
also pay $350,000 as fixed costs each year. The corporate tax rate
for the company is 25 percent, and the appropriate discount rate...
CRISPR/Cas9 technology is powerful but can produce unintended consequences beyond simply failing to produce a desired...
CRISPR/Cas9 technology is powerful but can produce unintended
consequences beyond simply failing to produce a desired
modification. Answer the following questions about unintended
consequences.
a. What is one unintended consequence that may arise when
allowing cells to repair Cas9 cuts by non-homologous end
joining?
b.What is one unintended consequence that might arise when
attempting to use a repair template to repair Cas9 cuts by
homologous recombination?
c.What is one unintended consequence that might arise from
careless use of gene drive...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $28,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $4,000 per year for 2
years. Fethe's cost of capital is 14%. Do not round intermediate
calculations.
What is...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $24,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%. Do not round intermediate
calculations.
What is...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%.
What is the expected NPV of the...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%.
1. What is the expected NPV of...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $3,000 per year for 2
years. Fethe's cost of capital is 11%. Do not round intermediate
calculations.
What is...
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