Question: Emruss Coffee Inc. has assets which it expects will generate $35,000 cash in a years time. At that time, it will have access to the
Emruss Coffee Inc. has assets which it expects will generate $35,000 cash in a years time. At that time, it will have access to the following two projects with payoffs in two years time, as given below. The required rate of return on all investments at all times is 0%. The firm expects to be liquidated in two years time when it will have the cashflows from any investments it might make in a years time. Any part of the $25,000 that will be available next year and is not invested will also be available for distribution when the firm is liquidated, but will not earn any return over that one year. The firm can access loans at t=1; bondholders will seek to obtain an expected return of 0% on their investments. The likelihood that the economy will be robust at t=2 is 50%.
Cashflows to the firm at t=2 from the two projects
| Project | Investment required at t=1 | Weak Economy | Robust Economy |
| Robusta | 30000 | 40,000 | 50,000 |
| Arabica | 70000 | 10,000 | 150,000 |
- (5 points) What are the NPVs of the Robusta and Arabica projects?
- (10 points) Which of the two projects, if any, will the firm undertake?
(10 points) If the firm decides not to undertake either of the projects, what is the reason for that? Is there anything that the firm could do to ameliorate the situation?
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts