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In the context of software development projects, a program manager was faced with the following choice last year: He had to option of going with a vendor who proposed a bid which was partly based on future integration costs that were beyond their control. Analysis suggested that total final cost for the program would come somewhere between 100K and 250K, based on the program manager's past-experiences. He commissioned an internal study to determine whether an in-house development effort (which would not be subject to any uncertainty due to integration) would cost more than 165K, thinking that he would take his chances with the vendor if the in-house work would cost more than 165K. 1.Determine the manager's risk tolerance based on the above information. Currently, the same manager is facing a hardware purchase decision, which is again subject to uncertainties because final hardware requirements are subject to future outcomes of external influences beyond his control. As the company has no in-house capability to build hardware, he solicited and received three bids, with the following possible cost outcomes: Bid Optimistic Cost (p=.05) Most likely cost (p=.5) Pessimistic cost (p=.95) A 95 125 175 B 100 110 190 C 75 150 180 2.Based on the manager's risk tolerance you calculated in (1), determine which bid should he accept. Please explain calculations in detail.
You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 9 percent, -12 percent, 21 percent, 31 percent, and 18 percent. Suppose the average inflation rate over this period was 3.4 percent and the average T-bil..
Mr. Smith has saved $1,800 each year for 20 years. A year after the saving period ended, Mr. Smith withdrew $7,500 each year for a period of 5 years. In the sixth and seventh years, he only withdrew $5,000 per year. In the eighth year, he decided to ..
Which of the following statements about valuing a firm using the APV approach is most CORRECT?
An n-year zero coupon bond with a par value of $1000 was purchased for $600. A 2n-year $1000 par value bond with annual coupons of $x was purchased for $850. A 3n-year $1000 par value bond with annual coupons of $x was purchased for $P. All three bon..
During the year just ended, Sherig Distributors, Inc had pretax earnings from operations of $487,000. In addition, during the year it received $26,000 in income from interest on bonds it held in Zig Manufacturing and received $26,000 in income from d..
What is each alternative's IRR and If the cost of capital for both methods is 9 percent, which method should be chosen? Why?
The operating cost of a new machine is $500 for the first year. Starting the second year, the operating cost increases by $200 per year for the next 10 years. Calculate the equivalent annual operating cost of the machine. What will be the present and..
Consider an asset that costs $729,000 and is depreciated straight-line to zero over its nine-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $176,000. If the relevant tax rate is 30 ..
A bond's market price is $1,100. It has a $1,000 par value, will mature in 12 years and has a coupon interest rate of 11 percent annual interest, but makes its interest payment semiannually. what is the bond's yield] to maturity? What happens to the ..
Assume that you are presently 30 years old and that you intend to retire when you turn 65. You would like to make sure that you have enough funds at the point of retirement to last until you are 95. How much should you be setting aside yearly between..
You have been asked to calculate the cost of capital for a company with the following information. The company has $7,500,000 in face value bonds, trading at 96.5% of face value. The YTM on these bonds is 5.75%. Given this information, what is the es..
Middlefield Motors is evaluating a project that would cost 5,900 dollars today. The project is expected to have the following other cash flows: 2,280 dollars in 1 year, -2,250 dollars in 3 years, and 8,120 dollars in 4 years. The cost of capital of t..
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