# Question: In the book Foundations of Financial Management 7th ed

In the book Foundations of Financial Management ( 7th ed.), Stanley B. Block and Geoffrey A. Hirt discuss a semiconductor firm that is considering two choices: ( 1) expanding the production of semiconductors for sale to end users or ( 2) entering the highly competitive home computer market. The cost of both projects is $ 60 million, but the net present value of the cash flows from sales and the risks are different.

Figure 5.3 gives a tree diagram of the project choices. The tree diagram gives a probability distribution of expected sales for each project. It also gives the present value of cash flows from sales and the net present value ( NPV present value of cash flow from sales minus initial cost) corresponding to each sales alternative. Note that figures in parentheses denote losses.

a For each project choice, calculate the expected net present value.

b. For each project choice, calculate the variance and standard deviation of the net present value.

c. Calculate the coefficient of variation for each project choice. See Exercise 5.12d for a discussion of the coefficient of variation.

d. Which project has the higher expected net present value?

e. Which project carries the least risk? Explain.

f. In your opinion, which project should be undertaken? Justify your answer.

Figure 5.3 gives a tree diagram of the project choices. The tree diagram gives a probability distribution of expected sales for each project. It also gives the present value of cash flows from sales and the net present value ( NPV present value of cash flow from sales minus initial cost) corresponding to each sales alternative. Note that figures in parentheses denote losses.

a For each project choice, calculate the expected net present value.

b. For each project choice, calculate the variance and standard deviation of the net present value.

c. Calculate the coefficient of variation for each project choice. See Exercise 5.12d for a discussion of the coefficient of variation.

d. Which project has the higher expected net present value?

e. Which project carries the least risk? Explain.

f. In your opinion, which project should be undertaken? Justify your answer.

## Answer to relevant Questions

Five thousand raffle tickets are to be sold at $ 10 each to benefit a local community group. The prizes, the number of each prize to be given away, and the dollar value of winnings for each prize are as follows: If you buy ...Thirty percent of all customers who enter a store will make a purchase. Suppose that six customers enter the store and that these customers make independent purchase decisions. a. Let x the number of the six customers who ...Classify each of the following random variables as discrete or continuous: a. x= the number of girls born to a couple who will have three children. b. x =the number of defects found on an automobile at final inspection. ...Suppose that x has a hypergeometric distribution with, , and . Find: a. p ( x = 0) b. p ( x = 1) c. p ( x = 2) d. p ( x = 3) e. p ( x = 4) f. p ( x ≥ 2) g. p ( x < 3) h. p ( x > 1) United Medicine, Inc., claims that a drug, Viro, significantly relieves the symptoms of a certain viral infection for 80 percent of all patients. Suppose that this drug is given to eight randomly selected patients who have ...Post your question