General capital budgeting rule for optical strategy

Assignment Help Financial Management
Reference no: EM13877816

A new product has two major potential markets. The product will succeed in both or fail in both, with equal probability. The markets are otherwise independent. You may enter the markets sequentially or simultaneously either now, one year from now, or two years from now. Later entry is not feasible. Market A requires an initial investment of $100 regardless of when it is entered. If the product is successful, market A will have a present value of $150 one year after entry. If the product fails Market A will be worth $90 one year after entry. Market B requires an initial investment of $55 regardless of when it is entered. One year after entry, B will have a present value of $130 or $20 for success and failure, respectively. For simplicity, perform all discounting in the problem at 5%.

c. Can you state a general capital budgeting rule for selecting the optical strategy in this and similar problems?

d. Suppose there are three potential markets, A, B, C, where A and B are as above and C requres an investment of $30 regardless of when entered, and promises a return of $50 or $30 one year later. Does the decision rule you formulated in part (c.) above produce the optimal decision for this revised problem? Why or why not?

Reference no: EM13877816

Questions Cloud

What is the cash conversion cycle : What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why the CCC is important to business.
Money market versus call option hedging : Money Market Versus Call Option Hedging. You expect that inflation in the United States will be 3%, versus 5% in the United Kingdom. The expected spot rate in one year is $1.8756. The spot rate of the pound as of today is $1.8000.
What is the difference in the current prices of these bonds : You are considering two bonds. Both have semi-annual, 8 percent coupons, $1,000 face values, and yields to maturity of 7.5 percent. Bond S matures in 4 years and Bond L matures in 8 years. What is the difference in the current prices of these bonds?
What is the character of gain and structure this transaction : Chris wants to purchase manufacturing equipment from Owl LLC but he is a little short on cash and cannot get a loan from a bank. Owl LLC is willing to finance the purchase and the agreed that Chris will purchase the equipment for $350,000 (this is co..
General capital budgeting rule for optical strategy : A new product has two major potential markets. The product will succeed in both or fail in both, with equal probability. The markets are otherwise independent. You may enter the markets sequentially or simultaneously either now, one year from now, or..
Require an effective annual interest rate : You are considering a 15-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.74%, how much should you be willing to pay for the bond?
River county is planning several capital acquisitions : Analyze the following scenario: River County is planning several capital acquisitions for the coming year. These include the purchase of two new garbage trucks at $150,000 each, one new bulldozer at $240,000, three new riding lawn mowers at $16,000 e..
What is the yield to maturity on bond : Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond if it is compounde..
Government vs. private sector : Find an article through ProQuest which discusses the differences between government and private sector accounting and finance. With your article and the assigned readings for the week, discuss the differences in government and private sector accounti..

Reviews

Write a Review

Financial Management Questions & Answers

  The payments are made monthly

You take out a 4 year car loan for $18,000. The loan has a 4% annual interest rate. The payments are made monthly. What are the monthly payments?

  Treasury investments that mature in two years

A bank has invested in U.S. Treasury investments that mature in two years. They will be held until maturity. The investments are funded with three-year maturity time deposits. The primary risk this bank faces is

  What benefits are gained from research planning and the

question 1.what benefits are gained from research planning and the analysis of financial statements? include sources

  The weighted average cost of capital for a risky

All else constant, the weighted average cost of capital for a risky, levered firm will decrease if:

  Developing a balanced scorecard explore the need for

developing a balanced scorecard explore the need for organisations to calculate and manage performance against

  Whats the monthly payment

Whats the monthly payment and how much is the borrowers income tax write off in the first year?

  Real interest rates are generally higher than nominal rate

On average, a coupon bond will increase in value as it approaches maturity. A bond with a coupon rate higher than its yield is worth more than its par value. Real interest rates are generally higher than nominal interest rates.

  High-risk area for natural disasters

Suppose your company has a building worth $380 million. Because it is located in a high-risk area for natural disasters, the probability of a total loss in any particular year is 1.2 percent. What is your company’s expected loss per year on this buil..

  Evaluating two different silicon wafer milling machines

You are evaluating two different silicon wafer milling machines. The Techron I costs $228,000, has a three-year life, and has pre-tax operating costs of $59,000 per year. The Techron II costs $400,000, has a five-year life, and has pre-tax operating ..

  What is the expected dollar return on the gamble

Suppose that a person won the Florida lottery and was offered a choice of two prizes: (1) $500,000 or (2) a coin-toss gamble in which he or she would get $1 million if a head were flipped and zero if a tail. What is the expected dollar return on the ..

  Taxable gain in year of sale using instalment sales method

Pat sells real estate for $30,000 cash and $120,000 5-year note. If her basis in the property is $90,000 and she receives only the $30,000 down payment in the year of the sale, how much is Pat's taxable gain in the year of sale using the instalment s..

  What is the accounts receivable balance

Suppose sales for the entire year were 100,000 and the COGS were 80% of sales. The inventory conversion period is 40 days. The accounts payable deferral period is 15 days, and the cash conversion cycle is 30 days. What is the accounts receivable bala..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd