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Question
A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash flow of $65 per unit, a discount rate of 15.5 percent, and an initial cost of $2.5 million. Sales will be revised upward to 8,200 units if the first year is a success and revised downward to 5,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year thereby increasing the sales projected to 16,800 units. Naturally, expansion would be desirable only if the project is a success. The project could also be dismantled after the first year and sold for $1,900,000. Assume that success and failure are equally likely. What is the current value of the option to expand?
A) $1,074,328
B) $1,183,561
C) $828,406
D) $448,920
E) $1,272,312
Answer
This answer is hidden. It contains 309 characters.
Related questions
Q:
Which one of the following statements concerning venture capitalists is correct?
A) Venture capitalists always assume management responsibility for the companies they finance.
B) Exit strategy is a key consideration when selecting a venture capitalist.
C) Venture capitalists limit their services to providing money to start-up firms.
D) Most venture capitalists are long-term investors in the companies they finance.
E) A venture capitalist normally invests in a new idea from conception through the IPO.
Q:
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Q:
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Q:
Depreciation for a tax-paying firm:
A) increases expenses and lowers taxes.
B) increases the net fixed assets as shown on the balance sheet.
C) reduces both the net fixed assets and the costs of a firm.
D) is a noncash expense that increases the net income.
E) decreases net fixed assets, net income, and operating cash flows.
Q:
Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared?
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B) Cash flow identity
C) Generally Accepted Accounting Principles
D) Financial Accounting Reporting Principles
E) Standard Accounting Value Guidelines
Q:
Net working capital is defined as:
A) total liabilities minus shareholders' equity.
B) current liabilities minus shareholders' equity.
C) fixed assets minus long-term liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.
Q:
You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value?
A) A sudden and unexpected increase in inflation
B) The replacement of old inventory items with more desirable products
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E) Addition of a stop light at the main entrance to the store's parking lot
Q:
Which one of the following statements is correct concerning the NYSE?
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B) The NYSE is the largest dealer market for listed securities in the United States.
C) The listing requirements for the NYSE are more stringent than those of NASDAQ.
D) Any corporation desiring to be listed on the NYSE can do so for a fee.
E) The NYSE is an OTC market functioning as both a primary and a secondary market.
Q:
Which one of the following is a means by which shareholders can replace company management?
A) Stock options
B) Promotion
C) Sarbanes-Oxley Act
D) Agency play
E) Proxy fight
Q:
Agency problems are most associated with:
A) sole proprietorships.
B) general partnerships.
C) limited partnerships.
D) corporations.
E) limited liability companies.
Q:
The Sarbanes-Oxley Act of 2002 holds a public company's ________ responsible for the accuracy of the company's financial statements.
A) managers
B) internal auditors
C) external legal counsel
D) internal legal counsel
E) Securities and Exchange Commission agent
Q:
Decisions made by financial managers should primarily focus on increasing the:
A) size of the firm.
B) growth rate of the firm.
C) gross profit per unit produced.
D) market value per share of outstanding stock.
E) total sales.
Q:
A partnership with four general partners:
A) distributes profits based on percentage of ownership.
B) has an unlimited partnership life.
C) limits the active involvement in the firm to a single partner.
D) limits each partner's personal liability to 25 percent of the partnership's total debt.
E) must distribute 25 percent of the profits to each partner.
Q:
The primary advantage of being a limited partner is:
A) the receipt of tax-free income.
B) the partner's active participation in the firm's activities.
C) the lack of any potential financial loss.
D) the daily control over the business affairs of the partnership.
E) the partner's maximum loss is limited to their capital investment.
Q:
Which one of the following statements concerning a sole proprietorship is correct?
A) A sole proprietorship is designed to protect the personal assets of the owner.
B) The profits of a sole proprietorship are subject to double taxation.
C) The owner of a sole proprietorship is personally responsible for all of the company's debts.
D) There are very few sole proprietorships remaining in the U.S. today.
E) A sole proprietorship is structured the same as a limited liability company.
Q:
Which one of the following questions is least likely to be addressed by financial managers?
A) How should a product be marketed?
B) Should customers be given 30 or 45 days to pay for their credit purchases?
C) Should the firm borrow more money?
D) Should the firm acquire new equipment?
E) How much cash should the firm keep on hand?
Q:
An example of a capital budgeting decision is deciding:
A) how many shares of stock to issue.
B) whether or not to purchase a new machine for the production line.
C) how to refinance a debt issue that is maturing.
D) how much inventory to keep on hand.
E) how much money should be kept in the checking account.
Q:
Individual investors might avoid requesting 100 shares in an upcoming IPO because they:
A) do not want to be bothered with submitting their bid to the SEC for approval.
B) do not want to abide by the quiet period requirement.
C) are prevented from entering orders for less than 1,000 shares.
D) are more apt to receive shares if the IPO is under allocated.
E) would have to pay a premium based on their small order size.