Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 11, Problem 17P
The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the “winged” keels first introduced on the 12-meter yachts that raced for the America’s Cup.
First, YYC would have to invest $10,000 at t = 0 for the design and model tank testing of the new boat. YYC’s managers believe there is a 60% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value.
The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost $500,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for $100,000. The managers estimate the probability is 80% that the boats will pass testing and that Stage 3 will be undertaken.
Stage 3 consists of converting an unused production line to produce the new design. This would cost $1 million at t = 2. If the economy is strong at this point, the net value of sales would be $3 million; if the economy is weak, the net value would be $1.5 million. Both net values occur at t = 3, and each state of the economy has a probability of 0.5. YYC’s corporate cost of capital is 12%.
- a. Assume this project has average risk. Construct a decision tree and determine the project’s expected
NPV . - b. Find the project’s standard deviation of NPV and coefficient of variation of NPV. If YYC’s average project had a CV of between 1.0 and 2.0, would this project be of high, low, or average stand-alone risk?
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The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the "winged" keels first introduced on the 12-meter yachts that raced for the America's Cup.
First, YYC would have to invest $12,000 at t = 0 for the design and model tank testing of the new boat. YYC's managers believe there is a 60% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value.
The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost $500,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for $100,000. The managers estimate that the probability is 80% that the boats will pass testing and that Stage 3 will be undertaken.
Stage 3 consists of converting an unused production line to produce the new design. This would cost $1…
Scottech is examining an investment opportunity that will involve buying $120,000 worth of equipment. They will
need $10,000 in net working capital up front. Shipping will cost $5,000 and installation will cost $10,000. The firm
paid a management consultant $4,000 to analyze this project, which is supposed to increase sales by $20,000 per
year. If the firm accepts the project, they will have to spend $3,500 to train the employees to use the new equipment.
The corporate tax rate is 21%. What is the initial outlay for the project?
($150,500)
($130,500)
($126,500)
O ($148,500)
O ($123,000)
Jamie Williams, the project manager of Arc Systems Ltd. is evaluating a proposal to install solarpanels on the roof of its factory. The panels will cost $150,000 per set. Depending on the price ofelectricity and the efficiency of the panels, the project will increase operating cash flows by either$50,000 per year or $75,000 per year. The useful life of the panels is 5 years. If early resultsindicate savings of $75,000 per year, four additional sets of panels will be installed immediatelyat the same cost with the same projected savings. The probability of either outcome is 50%. Usinga discount rate of 10%:Required:i. Compute the expected NPV of the project if the option to expand is NOT considered. ii. Compute the expected NPV of the project if the option to expand is considered. iii. Why is it important to consider real options in the capital budgeting process? GiveONE (1) specific example.
Chapter 11 Solutions
Financial Management: Theory & Practice
Ch. 11 - Prob. 2QCh. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11Q
Ch. 11 - Talbot Industries is considering launching a new...Ch. 11 - The financial staff of Cairn Communications has...Ch. 11 - Allen Air Lines must liquidate some equipment that...Ch. 11 - Although the Chen Company’s milling machine is...Ch. 11 - Wendys boss wants to use straight-line...Ch. 11 - The Campbell Company is considering adding a...Ch. 11 - The president of your company, MorChuck...Ch. 11 - The Rodriguez Company is considering an...Ch. 11 - St. Johns River Shipyards welding machine is 15...Ch. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Shrieves Casting Company is considering adding a...Ch. 11 - Disregard the assumptions in Part a. What is the...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Estimate the required net operating working...Ch. 11 - Prob. 6MCCh. 11 - Calculate the project cash flows for each year....Ch. 11 - Prob. 8MCCh. 11 - What is a real option? What are some types of real...
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