Question

In: Finance

An investor is interested in purchasing a company and wants you to determine the maximum value...

An investor is interested in purchasing a company and wants you to determine the maximum value of the company today considering the opportunity cost of capital is 20%. The company assets are in two areas. First, an existing production operation was developed by the company over the past two years for equipment and development costs of $100,000 two years ago, $200,000 one year ago, and cost and revenues that canceled each other during the past year. It is projected that revenue minus operating expense net profits will be $120,000 per year at the end of each of the next 12 years when production is expected to terminate with a zero salvage value. The second company asset is a mineral property that is projected to be developed for a $350,000 future cost one year from now with expected future profits of $150,000 per year starting two years from now and terminating 10 years from now with a zero salvage value. Use NPV analysis to determine the value of the company on a before-tax basis. Are there any sunk costs in this problem?

USE OF EXCELL SHEET IS ENCOURAGED FOR THIS PROBLEM

Solutions

Expert Solution

Yes there are sunk cost in the Question. Sunk is the irrelevant cost because the cost has already been incurred and will not change whether project accpt or reject.

So Equipment and development cost $100000 two year ago and $200000 one yar ago are the Sunk Cost.

Belwo is the NPV calculation in excel Sheet As per requirement:

Year Project 1 Cash Flows Project 2 Cash Flows Total Cash Flows PV factor @ 20% Present Value
0 0.00 0.00 0.00 1.0000 0.0000
1 120000.00 -350000.00 -230000.00 0.8333 -191666.6667
2 120000.00 150000.00 270000.00 0.6944 187500.0000
3 120000.00 150000.00 270000.00 0.5787 156250.0000
4 120000.00 150000.00 270000.00 0.4823 130208.3333
5 120000.00 150000.00 270000.00 0.4019 108506.9444
6 120000.00 150000.00 270000.00 0.3349 90422.4537
7 120000.00 150000.00 270000.00 0.2791 75352.0448
8 120000.00 150000.00 270000.00 0.2326 62793.3706
9 120000.00 150000.00 270000.00 0.1938 52327.8089
10 120000.00 150000.00 270000.00 0.1615 43606.5074
11 120000.00 0.00 120000.00 0.1346 16150.5583
12 120000.00 0.00 120000.00 0.1122 13458.7986
NPV 744910.1533

Related Solutions

2. Suppose an investor is interested in purchasing the following income-producing property for $1,200,000. The investor...
2. Suppose an investor is interested in purchasing the following income-producing property for $1,200,000. The investor has estimated the expected cash flows over the next four years to be as follows: Year 1 = $100,000, Year 2 = $110,000, Year 3 = $120,000, Year 4 = $120,000. Assuming the investor’s required rate of return is 11% and the estimated proceeds from selling the property at the end of year four is $1,250,000, what is the NPV of the project? please...
You are consulting with a company who is interested in purchasing a marketing plan from you....
You are consulting with a company who is interested in purchasing a marketing plan from you. Currently, their main product has a sales price of $30 per unit, variable cost of $12 per unit and total fixed costs associated with this produce of $55,000. Last year they sold 18,000 units. In your plan, you recommend that they lower the sales price to $28 and your plan costs $9,500 annually. You estimate that their sales should increase to 21,000 units if...
An investor is interested in purchasing a 30-year U.S. government bond carrying an 8 percent coupon...
An investor is interested in purchasing a 30-year U.S. government bond carrying an 8 percent coupon rate. The bond’s current market price is $935 for a $1000 par value instrument. Suppose the investor sells the bond at the end of 13 years for $970. What is the holding-period yield? What is the effective yield?
Suppose that you are interested in purchasing a house in a particular area of a city...
Suppose that you are interested in purchasing a house in a particular area of a city and are inter- ested in the average size of the homes in that area. In a random sample of 200 homes, you find a sample mean of 2127.94 square feet and a standard deviation of 387.276 square feet. Further- more, you calculated a 99% confidence interval for the true mean size to be (2056.72, 2199.16). Why is it unnecessary to check for normality in...
An investor wants to invest his money in a fund that has maintained a steady value....
An investor wants to invest his money in a fund that has maintained a steady value. A fund manager claims that one of his bond funds has maintained an average price of $18.00 with a variance of 0.1. In order to find out if the fund manager's claim is true, the investor samples the prices from 15 random days and finds a standard deviation of 0.2813 in the price. Can the investor conclude that the variance of the share price...
a. You are interested in purchasing a new automobile that costs$37,000. The dealership offers you...
a. You are interested in purchasing a new automobile that costs $37,000. The dealership offers you a special financing rate of 12% APR (1%) per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to:A. $779B. $1,364C. $974D. $1,559B. Credenza Industries is expected to pay a dividend of $2.00 at the end of the coming year. It is...
You are interested in purchasing a new 2004 Corvette at Rainbow Chevrolet Pontiac. If you will...
You are interested in purchasing a new 2004 Corvette at Rainbow Chevrolet Pontiac. If you will have to make monthly payments of $1,000.00 for four years, and the loan rate equals 5.9%, what amount is being borrowed to finance the cost of the car? Place the appropriate values in the proper cells in row 11, given the columns as provided below. The remaining instructions are stated in Q1. Row Column letter 3Number A B C D E F 9 Q3....
(in java) Find the maximum value and minimum value in milesTracker. Assign the maximum value to...
(in java) Find the maximum value and minimum value in milesTracker. Assign the maximum value to maxMiles, and the minimum value to minMiles. Sample output for the given program: Min miles: -10 Max miles: 40 given code below (please bold the solution, thank you!) import java.util.Scanner; public class ArraysKeyValue { public static void main (String [] args) { Scanner scnr = new Scanner(System.in); final int NUM_ROWS = 2; final int NUM_COLS = 2; int [][] milesTracker = new int[NUM_ROWS][NUM_COLS]; int...
Find the maximum value and minimum value in milesTracker. Assign the maximum value to maxMiles, and...
Find the maximum value and minimum value in milesTracker. Assign the maximum value to maxMiles, and the minimum value to minMiles. Sample output for the given program: Min miles: -10 Max miles: 40 import java.util.Scanner; public class ArraysKeyValue { public static void main (String [] args) { Scanner scnr = new Scanner(System.in); final int NUM_ROWS = 2; final int NUM_COLS = 2; int [][] milesTracker = new int[NUM_ROWS][NUM_COLS]; int i; int j; int maxMiles; // Assign with first element in...
An investor wants to invest his money in a fund which has maintained a steady value....
An investor wants to invest his money in a fund which has maintained a steady value. A fund manager claims that one of his bond funds has maintained an average price of $⁢19.00 with a variance of 0.2. In order to find out if the fund manager's claim is true, the investor samples the prices from 22 random days and finds a standard deviation of 0.0947 in the price. Can the investor conclude that the variance of the share price...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT