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Finance
![(21) Application of Real Option Analysis Through the Sport Hotel Project: Rework the NPV
of the Sport Hotel project incorporating two changes: (1) the probability that the city will
be awarded the franchise is 40%, and (2) the building costs in the first year of the project
are not $1 million as originally stated but is $1.5 million instead. All other values are the
same.
[Answer] NPV = $0.10 million
A <
Move forward
1
1
B
1
Franchise is granted ===> C<
Finish
1
Do Not Move Forward
Abandon NPV = -$1.5 million
Finish
Franchise is denied ====> D<
Abandon
NPV = +$2.5 million ($8M-$5.5M)
At Node B: .4*2.5 million +.6* -1.5 million = $0.10 million
At Node A: Accept the project as NPV > 0
NPV = $3.5 million ($2M-$5.5M)
NPV of -$1.5 million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F01d01b29-ede7-42ba-8dcd-8c0b18e94cc8%2Fd5480b8a-0179-4af9-a0aa-69c468c33666%2Fe3lj0cu_processed.jpeg&w=3840&q=75)
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- Porter Company is analyzing two potential Investments. Project X $ 97,090 Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Multiple Choice If the company is using the payback period method, and it requires a payback of three years or less, which project(s) should be selected? O 32,500 32,500 32,500 0 Both X and Y are acceptable projects. O Project Y. Project Y $ 77,000 Project Y because it has a lower Initial Investment. Project X 5,700 34,500 34,500 25,000 Neither X nor Y is an acceptable project.Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?2. Data for two alternatives are as follows: Alternatives A B Investment P35, 000 P50, 000 Annual benefits P20, 000 P25, 000 Annual O and M P6, 450 P13, 830 Estimated life, years 4 8. Net salvage value Р3, 500 Using an interest rate of 20%, which alternative should be chosen? Ans: Alternative A is referred over Alternative B
- Evaluate these mutually exclusive alternatives with a horizon of 20 years and a MARR of 15% Use the conventional B/C ratio by PW analysis method. Note: (Do nothing) is not an option. A B Initial Investment $9,500 $18,500 Annual Savings $3,200 $5,000 Annual Costs Salvage Value $1,000 $2,750 $600 $4,200 Conventional B-C ratio with PW: B-C= = PW(benefits of the proposed project) PW(total costs of the proposed project) PW(B) I-PW(MV) + PW(O&M) A B C 1 A B 2 Initial Invest $9,500 $18,500 3 Ann. Savings $3,200 $5,000 4 Ann. Costs $1,000 $2,750 5 Salvage Val $6,000 $4,200 6 PW of Ben. $20,030 $31,297 7 PW of Costs $15,393 $35,457 a BIC 1.30 0.88You are considering the following two projects which are mutually exclusive. The required return on each project is 14%. Which project should you accept and what is the best reason for that decision? Year Project A Project B 0 $-46,000 $-46,000 1 $25,000 $11,000 2 $18,000 $19,000 3 $16,000 $32,000 a) Both Project A and B since they both have positive NPV b) Project A, because it has the higher profitability index c) Project A, because it has the higher net present value d) Project B, because it has the higher net present valueVMC Inc is considering 2 projects SunA and MoonB which are independent, what would be the correct decision using the payback decision rule if the payback cutoff period is 4 years? Project NPV IRR SunA $6.5 million MoonB $1.8 million O a. Additional information needed. O b. Accept MoonB project. O c. Accept only SunA project. O d. Accept both projects. Oe. Reject both projects. 4.66% 4.33% Payback Period 3.6 years 3.9 years
- Q16) Salalah company management is considering three competing investment Projects A, B and C. Year Project A Project C 1000 300 Project B Initial Investment 1000 250 1000 1 275 275 250 300 300 300 300 3 250 275 4 250 250 275 275 Assume a discount Rate of 3% Required: Use the information below and help the management in choosing the most desirable Project using the following techniques: a) Payback period b) Discounted Payback Period c) Net Present value d) Profitability index.SNA company management is considering two competing investment Projects A and B. Year Project A Project B Initial Investment 1000 1000 1 275 300 2 275 300 3 275 300 4 275 300 5 275 300 DISCOUNT RATE 3.15% help management to choose the most desirable Project .You must use each technique from 1 to 4 and get the answer? 1)Payback Period Technique.2) Discounted Payback Period Technique.3) Net Present Value Technique4) Profitability Index Technique.Connor Corporation is considering two projects (see below). For your analysis, ass rate of return of 10%. Based on your analysis, which is the best choice? Initial Investment Cash Flow Year 1 PV NPV Profitability Index IRR Project A -465,000 510,000 463,636.364 ($1,363.64) $1.00 ANSWER 10% Project B -700,000 You can change the i 850,000 772,727.273
- You are analyzing a proposed project and have compiled the following information: WACC (Required Return): 8.00% Year 1 3 -$200,000 $70,000 $80,000 $90,000 Cash flows Required payback period: 2 years Required discounted payback period: 2.5 years What is the project's IRR? Would the company accept or reject the project based on the IRR criterion? 8.00%; reject 8.00%; accept 9.28%; reject O 9.28%; acceptPorter Company is analyzing two potential Investments. Project X $ 75,900 Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Multiple Choice O If the company is using the payback period method, and it requires a payback of three years or ess, which project(s) should be selected? Project Y. 26,000 26,000 26,000 0 Project X. Project Y $ 64,000 Both X and Y are acceptable projects. 4,400 28,000 28,000 20,000 Neither X nor Y is an acceptable project. Project Y because it has a lower Initial Investment.Coffer Company is analyzing two potential investments. Cost of machine Project X $ 97,090 Net cash flow: Year 1 Year 2 Year 3 Year 4 Project Y $ 72,000 36,500 3,700 36,500 33,500 36,500 33,500 0 13,000 If the company is using the payback period method, and it requires a payback period of three years or less, which project(s) should be selected? Multiple Choice ○ Project Y. ○ Project X. Both X and Y are acceptable projects. Neither X nor Y is an acceptable project. Project Y because it has a lower Initial Investment.