13-1 a. Project A requires $9 million initial capital outlay at T=0, with WACC = 11%, and cash flows as shown below in millions. There is 50% chance that the Project A will generate $6 million each year for 3 years, and 50% chance to generate $1 million each year for 3 years, what is the expected NPV for the Project A, and will the Project be accepted?

0 1 2 3

50% Prob. | | |

6 6 6

-9

| | |

50% Prob. 1 1 1

b. If the project is hugely successful, $10 million will be spent at the end of Year 2, and the new venture will be sold for $20 million at the end of Year 3, as shown below, what is the expected NPV for the Project A, and will the Project A be accepted?

0 1 2 3

50% Prob. | | |

6 6 6

-10 +20

-9 -4 26

| | |

50% Prob. 1 1 1

c. What is the value of growth option (the difference between NPV with growth option and without option, using 0 if the NPV is negative)?

13-2 a. Project X has an up-front cost of $20 million.The project is expected to produce after-tax cash flows of $7.5 million at the end of each of the next 3 years (t = 1, 2, and 3).The project has a WACC=10%. What is the project's NPV?

b. However, if the company waits a year they will find out more about the project's expected cash flows. If they wait a year, there is a 50% chance the market will be strong and the expected cash flows will be $10 million a year for 3 years. There is also a 50% chance the market will be weak and the expected cash flows will be $5 million a year for 3 years. The project's initial cost will remain $20 million, but it will be incurred at t = 1 only if it makes sense at that time to proceed with the project. So, should the company go ahead with the project today or wait for more information?

Wait 1 year; cash flows are shown as below in millions on time line:

0 1 2 3 4

Strong demand | | | | |

50% Prob. 0 -20 10 10 10

Weak demand | | | | |

50% Prob. 0 -20 5 5 5

13-3 If a truck company ABC has an initial capital outlay of $22,500, WACC of 10%, and the following 5 possible cash flow patterns, depending upon the number of years it operates its truck business,

If operating for only one year:CF0 = -22500, CF1 = 23750

If operating for 2 years:CF0 = -22500, CF1 = 6250, CF2 = 20250

If 3 years:CF0 = -22500, CF1 = 6250, CF2 = 6250, CF3 = 17250

If 4 years:CF0 = -22500, CF1 = 6250, CF2 = 6250, CF3 = 6250, CF4 = 11250

If 5 years:CF0 = -22500, 6250 each year for 5 years

In which year should the Company abandon its operation, so the company's NPV will achieve the highest value?

DE Tahoma AaBbCcDdEe AaBbCcDdEe AaBbCcD AaBbCcDdE Paste B I U abe X2 X2 A& A. Norma No Spacing Heading 1 Heading 2 Styles Pane 13-1 a. Project A requires $9 million initial capital outlay at T=0, with WACC = 11%, and cash flows as shown below in millions. There is 50% chance that the Project A will generate $6 million each year for 3 years, and 50% chance to generate $1 million each year for 3 years, what is the expected NPV for the Project A, and will the Project be accepted? 0 50% Prob -9 50% Prob. b. If the project is hugely successful, $10 million will be spent at the end of Year 2, and the new venture will be sold for $20 million at the end of Year 3, as shown below, what is the expected NPV for the Project A, and will the Project A be accepted? 0 50% Prob. satw -9 26 C 50% Prob. sin C. What is the value of growth option (the difference between NPV with growth option and without option, using 0 if the NPV is negative)? 13-2 a. Project X has an up-front cost of $20 million. The project is expected to produce after-tax cash flows of $7.5 million at the end of each of the next 3 years (t = 1, 2, and 3). The project has a WACC=10%. What is the project's NPV? b. However, if the company waits a year they will find out more about the project's expected cash flows. If they wait a year, there is a 50% chance the market will be strong and the expected cash flows will be $10 million a year for 3 years. There is also a 50% chance the market will be weak and the expected cash flows will be $5 million a year for 3 years. The project's initial cost will remain $20 million, but it will be incurred at t = 1 only if it makes sense at that time to proceed with the E project. So, should the company go ahead with the project today or wait for more information? ct Wait 1 year; cash flows are shown as below in millions on time line: Strong demand 0 10% 2 50% Prob. 20 10 10 10 e Weak demand 50% Prob. -20 13-3 If a truck company ABC has an initial capital outlay of $22,500, WACC of 10%, and the following 5 possible cash flow patterns, depending upon the number of years it operates its truck business, e If operating for only one year: CFO = -22500, CF1 = 23750 If operating for 2 years: CFO = -22500, CF1 = 6250, CF2 = 20250 If 3 years: CFO = -22500, CF1 = 6250, CF2 = 6250, CF3 = 17250 If A voare: CE. - -22500 CE. - 6250 CE2 - 6250 CE3 - 6250 CE. - 11250 541 words English (United States) E Focus + 100%Tahoma AaBbCcDdEe AaBbCcDdEe AaBbCcD AaBbCcDdE Paste BI U abe X2 X2 AL A = = = = 13 . . Normal No Spacing Heading 1 Heading 2 Styles Pane 50% Prob. b. If the project is hugely successful, $10 million will be spent at the end of Year 2, and the new venture will be sold for $20 million at the end of Year 3, as shown below, what is the expected NPV for the Project A, and will the Project A be accepted? 50% Prob. Alba 26 50% Prob. c. What is the value of growth option (the difference between NPV with growth option and without option, using 0 if the NPV is negative)? 13-2 a. Project X has an up-front cost of $20 million. The project is expected to produce after-tax cash flows of $7.5 million at the end of each of the next 3 years (t = 1, 2, and 3). The project has a WACC=10%. What is the project's NPV? b. However, if the company waits a year they will find out more about the project's expected cash flows. If they wait a year, there is a 50% chance the market will be strong and the expected cash flows will be $10 million a year for 3 years. There is also a 50% chance the market will be weak and the expected cash flows will be $5 million a year for 3 years. The project's initial cost will remain $20 million, but it will be incurred at t = 1 only if it makes sense at that time to proceed with the project. So, should the company go ahead with the project today or wait for more information? Wait 1 year; cash flows are shown as below in millions on time line: Strong demand 10% 50% Prob. -20 10 10 Weak demand 50% Prob. 13-3 If a truck company ABC has an initial capital outlay of $22,500, WACC of 10%, and the following 5 possible cash flow patterns, depending upon the number of years it operates its truck business, If operating for only one year: CFO = -22500, CF1 = 23750 if operating for 2 years: CFO = -22500, CF1 = 6250, CF2 = 20250 If 3 years: CFO = -22500, CF1 = 6250, CF2 = 6250, CF3 = 17250 If 4 years: CFO = -22500, CF1 = 6250, CF2 = 6250, CF3 = 6250, CF4 = 11250 If 5 years: CFO = -22500, 6250 each year for 5 years In which year should the Company abandon its operation, so the company's NPV will achieve the highest value? 541 words English (United States) Co E Focus + 100%