Reference no: EM13967560
Certainty Equivalent Method
MacKenzie-Rabb, Inc., is a Texas-based manufacturer and distributor of components and replacement parts for the auto, machinery, farm, and construc- tion equipment industries. The company is currently funding a program of capital investment that is necessary to reduce production costs and thereby meet an onslaught of competition from low-cost suppliers located in Mexico and throughout Latin America. MacKenzie-Rabb has a limited amount of capital available and must carefully weigh both the risks and potential rewards associated with alternative investments. In particular, the company seeks to weigh the advantages and disadvantages of a new investment project, project X, in light of two other recently adopted investment projects, project Y and project Z:
Expected Cash Flows After Tax (CFAT) per Year
Year
|
Project X
|
Project Y
|
Project Z
|
2001
|
$10,000
|
$20,000
|
$0
|
2002
|
10,000
|
18,000
|
2,500
|
2003
|
10,000
|
16,000
|
5,000
|
2004
|
10,000
|
14,000
|
7,500
|
2005
|
10,000
|
12,000
|
10,000
|
2006
|
10,000
|
10,000
|
12,500
|
2007
|
10,000
|
8,000
|
15,000
|
2008
|
10,000
|
6,000
|
17,500
|
2009
|
10,000
|
4,000
|
20,000
|
2010
|
10,000
|
2,000
|
22,500
|
PV of Cash Flow @ 5%
|
|
$91,131
|
$79,130
|
Investment Outlay in 2000:
|
$60,000
|
$60,000
|
$50,000
|
A. Using a 5% risk-free rate, calculate the present value of expected cash flows after tax (CFAT) for the 10-year life of project X.
B. Calculate the minimum certainty equivalent adjustment factor for each project's CFAT that would justify investment in each project.
C. Assume that the management of MacKenzie-Rabb is risk averse and uses the certainty equivalent method in decision making. Is project X as attractive or more attractive than projects Y and Z?
D. If the company would not have been willing to invest more than $60,000 in project Y nor more than $50,000 in project Z, should project X be undertaken?
Describe the encyclopedias as being a complete set
: ou quickly put an ad in your local newspapers, in which you describe the encyclopedias as being a complete set, only two years old, perfect condition, and that the buyer must buy the whole set.
|
What are the problems with lz77? explain in detail
: What are the problems with LZ77? Explain in detail
|
Do different cultures define this term in different ways
: Is terrorism subjective in nature, or can it be clearly defined? Do different cultures define this term in different ways?
|
How many poles does this motor have
: A three-phase 60-Hz induction motor runs at 715 r/min at no load and at 670 r/min at full load. How many poles does this motor have?
|
Find out the certainty equivalent method
: MacKenzie-Rabb, Inc., is a Texas-based manufacturer and distributor of components and replacement parts for the auto, machinery, farm, and construc- tion equipment industries.
|
Find speed of the magnetic fields in revolutions per minute
: A 220-V three-phase six-pole 50-Hz induction motor is running at a slip of 3.5 percent. Find the speed of the magnetic fields in revolutions per minute and the speed of the rotor in revolutions per minute
|
Find out the certainty equivalent method
: MacKenzie-Rabb, Inc., is a Texas-based manufacturer and distributor of components and replacement parts for the auto, machinery, farm, and construc- tion equipment industries.
|
How the economic environment impacts your chosen company
: Explain how the economic environment impacts your chosen company (Amazon) and its customers. Explain how the socio-cultural environment impacts your chosen company (Amazon) and its customers
|
What will the new system frequency be
: At a given instant, the total system loads are 260 MW at a frequency of 60 Hz. What are the no-load frequencies of each of the system's generators?
|