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You are considering an investment in a new sub-industry of interest to your firm. To understand the importance of terminal value assumptions you have decided to calculate NPV under two different sets of assumptions. The project requires an initial outlay of $200,000. In addition, after-tax cash flows for years one through six will be $25,000 per year. The appropriate discount rate for this project is 12 percent. To deal with the projects terminal value you are considering two potential methods of modifying the end-of-year-six cash flow. i. Assume the end-of-year seven cash flow is 1 percent larger than the end-of-year-six cash flow. The cash flows will continue to grow in perpetuity at a constant rate of 1 percent thereafter. ii. Assume the project can be liquidated at the end of year six (after receiving the end-of-year-six cash flow) to net an additional after-tax cash inflow of $65,000. a. Calculate the project NPV assuming i. b. Calculate the project NPV assuming ii. c. Interpret your answers to a. and b. In your discussion, clarify how the assumptions must coincide with management decisions.
The expected return and standard deviation of a portfolio that is 60 percent invested in 3 Doors, Inc., and 40 percent invested in Down Co. are the following: What is the standard deviation if the correlation is +1? 0? −1?
Floyd wants to invest the $15,000 he received from his grandfather's estate. - What amount will he have in five years if he earns a 9% return? If he receives a 10% return? A 12% return?
Does Medicaid's medically needy category make sense to you? Why or why not? For example, is it a good idea to discount medical expenses so high-need individuals can access healthcare through Medicaid?
With free trade, why would production occur only in one country? - Does opening trade bring gains to both countries? Explain.
When John purchased his home, he borrowed $200,000 from his bank at 6% interest rate per year to be repaid in 360 equal annual end-of-month payments in 30 years. The new loan would be made equal to the balance due on the old loan plus the $2,000 serv..
On January 1, 2016, you take out a mortgage loan in the amount of $1,000,000 to buy a piece of development property. Interest will accrue on your loan at 4.5%, fixed. Monthly payments of principal and interest will be required on the first of each mo..
Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. These two projects..
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child’s college education. Assuming college savings are invested in an account paying 7% interest, then what is the..
Depreciation is an accounting concept intended to match the cost of an asset with the revenue the asset produces over time. It’s not a cash flow. But going from a straight-line depreciation calculation to some form of accelerated depreciation will in..
The real risk-free rate is 3.05%. Inflation is expected to be 2.6% this year, 3.85% next year, and then 3.2% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of years to maturity. What is the yield on a 7-year T..
What do economists mean by the channels of monetary policy?- What is the interest rate channel?- What is the bank lending channel?
Fuji Software, Inc., has the following mutually exclusive projects. Year Project A Project B 0 –$ 24,000 –$ 27,000 1 14,000 15,000 2 10,500 11,500 3 3,300 10,500 Calculate the payback period for each project. What is the NPV for each project if the a..
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