Xia Corporation is a company whose sole assets are $100,000 in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows:

Xia plans to invest any unused cash today at the risk-free interest rate of 10%. In one year, all cash will be paid to investors and the company will be shut down.
a. What is the NPV of each project? Which projects should Xia undertake and how much cash should it retain?
b. What is the total value of Xia’s assets (projects and cash) today?
c. What cash flows will the investors in Xia receive? Based on these cash flows, what is the value of Xia today?
d. Suppose Xia pays any unused cash to investors today, rather than investing it. What are the cash flows to the investors in this case? What is the value of Xia now?
e. Explain the relationship in your answers to parts (b), (c), and(d).

  • CreatedJuly 27, 2014
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