A company is considering bidding for the exclusive rights to undertake a project, which will initially...
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A company is considering bidding for the exclusive rights to undertake a project, which will initially cost $70mln The company has forecast the following end of year cash flows for the four-year project. Year Cash flows (Smin) 1 40 2 30 3 20 4 10 The relevant cost of capital for this project is 11% and the risk free rate is 4.5%. The likely volatility (standard deviation) of the cash flows is estimated to be 50%. a. Find the NPV of the project and recommend would you accept the project or not? b. Suppose the company does not have to make the decision right now but can wait for two years before it needs to make the decision. Find the NPV with the option to delay the decision for two years c. Based on the facts that the company can delay its decision by two years and a high volatility, what is the maximum value that it can bid for the exclusive rights to undertake the project? A company is considering bidding for the exclusive rights to undertake a project, which will initially cost $70mln The company has forecast the following end of year cash flows for the four-year project. Year Cash flows (Smin) 1 40 2 30 3 20 4 10 The relevant cost of capital for this project is 11% and the risk free rate is 4.5%. The likely volatility (standard deviation) of the cash flows is estimated to be 50%. a. Find the NPV of the project and recommend would you accept the project or not? b. Suppose the company does not have to make the decision right now but can wait for two years before it needs to make the decision. Find the NPV with the option to delay the decision for two years c. Based on the facts that the company can delay its decision by two years and a high volatility, what is the maximum value that it can bid for the exclusive rights to undertake the project?
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Answer rating: 100% (QA)
a To find the Net Present Value NPV of the project we need to discount the cash flows to their present value and subtract the initial cost Using the f... View the full answer
Related Book For
Contemporary Business Mathematics with Canadian Applications
ISBN: 978-0133052312
10th edition
Authors: S. A. Hummelbrunner, Kelly Halliday, K. Suzanne Coombs
Posted Date:
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