XYZ Construction Company earned $900,000 this year and is trying to decide if they should purchase...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
XYZ Construction Company earned $900,000 this year and is trying to decide if they should purchase ABC Construction Company for the price of $995,982. ABC Construction is located in another part of the state and the purchase will expand their coverage area. However, it will take one year to modify the facility and upgrade the material laydown area. Next year the company expects to earn $1,275,000 if the economy is favorable but only $725,000 if the economy is unfavorable. Estimates show a 71% probability of a favorable economy and a 29% probability of an unfavorable economy. There will be no increased revenue or profit if they do not purchase ABC Construction Company. Perform an analysis for this uncertainty by solving the following: 1. Draw a decision tree (you may draw it by hand). 2. Considering a time value of money discount rate of 12%, determine the Net Present Value (NPV)? 3. Based on a 12% discount rate, state whether XYZ Construction should purchase the other company? 4. State whether XYZ Construction should purchase the other company if the discount rate is 17%? 5. Should ABC Construction be purchased if the discount rate where only 8%? XYZ Construction Company earned $900,000 this year and is trying to decide if they should purchase ABC Construction Company for the price of $995,982. ABC Construction is located in another part of the state and the purchase will expand their coverage area. However, it will take one year to modify the facility and upgrade the material laydown area. Next year the company expects to earn $1,275,000 if the economy is favorable but only $725,000 if the economy is unfavorable. Estimates show a 71% probability of a favorable economy and a 29% probability of an unfavorable economy. There will be no increased revenue or profit if they do not purchase ABC Construction Company. Perform an analysis for this uncertainty by solving the following: 1. Draw a decision tree (you may draw it by hand). 2. Considering a time value of money discount rate of 12%, determine the Net Present Value (NPV)? 3. Based on a 12% discount rate, state whether XYZ Construction should purchase the other company? 4. State whether XYZ Construction should purchase the other company if the discount rate is 17%? 5. Should ABC Construction be purchased if the discount rate where only 8%?
Expert Answer:
Answer rating: 100% (QA)
1 Decision Tree simplified Purchase ABC Construction Favorable Economy Unfavorable Economy 1275000 7... View the full answer
Related Book For
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
Posted Date:
Students also viewed these management leadership questions
-
Bill and Fiona Russell have always enjoyed craft beer, and in recent years have started making small batches at home. As they experimented, they mastered several niche recipes including a key lime...
-
13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...
-
Name: 9. 11. Bell: Directions: Evaluate each expression using the order of operations. 1. 17-5-4+2 2. 40-32+8+5--2 Date: 5. 2018-(5+3)+7] 3.35-14+2+8 7.1+(-2-5)+(14-17)-4 25 +8+3 4+3 Unit 1: Algebra...
-
1. Suppose that the first ball is replaced before the second ball is drawn. Find the expected number of red balls that will be drawn. 2. Was your intuitive guess in part 5 correct? 3. Suppose that...
-
Goldberg & Broverman, Inc., publishers of movie and song trivia books, made the following errors in adjusting the accounts at year-end (December 31): a. Did not record $15,000 depreciation on the...
-
A company manufacturing artificial hip devices approved by the FDA has been informed that a number of patients (about 35 percent) using their artificial hips are experiencing a high level of lead in...
-
In the month of March, Trendy Spa services 570 clients at an average price of $120. During the month, fixed costs were $21,000 and variable costs were 65% of sales. Instructions (a) Determine the...
-
12.Indicate, by clicking on the relevant boxes, whether the following statements are true or false?
-
Mercier Manufacturing produces a plastic part in three sequential departments: Extruding, Fabricating, and Packaging. Mercier uses the weighted-average process costing method to account for costs of...
-
A fundamental aspect of Six Sigma methodology is the identification of critical to quality (CTQ) characteristics that are vital to customer satisfaction. Identify and depict the various activities...
-
Does Buffet's indicator of valuation help forecast market stock returns.
-
The general formula for Blank______ is (1 + quoted rate/m)m 1. Multiple choice question. the EAR the APR the SAIR
-
TOPIC : "Impact of Covid on student's mental health" Take sample from australian point of view INTRODUCTION of topic PARTICIPANTS Measures Measure 1 What was the name of the scale and what it...
-
Compare and contrast the benefits and costs of Corporate Social Responsibility for the the automotive industries in various countries. Analyse the potential cultural and institutional factors that...
-
Please send all the _____________ for the Christmas party, out by December 1. Question 19 options: RSVP's RSVP RSVPS RSVPs
-
Consider a simple model of the labour market, characterised by a downward-sloping labour demand curve and an upward sloping wage-setting curve in the N W/P - plane, where N is the number of employed...
-
Troy is a qualified radiologist who operates a successful radiology practice from purpose- built rooms attached to his house. Troy works in the practice three days a week, and the other two days he...
-
Stephen has learned that his great-aunt intends to give him $4,000 each year he is studying at university. Tuition must be paid in advance, so Stephen would like to receive his payments at the...
-
A firm decides to enter into a lease agreement. The lease term is four years, while the economic life of the asset is five years. The annual lease payment is $10,000 at the beginning of each year,...
-
Which of the portfolios identified in Practice Problem 18 are undervalued, correctly valued, and overvalued?
-
A child receives \($100\),000 as a gift, which is deposited in a bank account earning 6 percent compounded semiannually. If \($5\),000 is withdrawn at the end of each half year, how long will the...
-
The plan was to leave $5,000 on deposit in a savings account for 15 years at 6.5 percent interest compounded annually. It became necessary to withdraw $1,500 at the end of the fifth year. How much...
-
A deposit of $3,000 is made in a savings account that pays 7.5 percent interest compounded annually. How much money will be available to the depositor at the end of 16 years? a. $8,877 b. $10,258 c....
Study smarter with the SolutionInn App