PROBLEM 1

PROBLEM 2

Brandt Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm? WACC = 11.5% Dollars in Thousands NPV This Prob. x t = 0 t=1 t = 2 t = 3 State NPV Prob. = 20% $800.0 $800.0 S800.0 $938.10 $187.62 Prob. = 60% -$1,000 $520.0 $520.0 $520.0 $259.76 $155.86 Prob. = 20% -$200.0 -$200.0 -$200.0 -$1,484.52 -$296.90 Exp. NPV = $ 46.57 *Note, recompute the NPV to arrive at a more accurate values. Spot-Free Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV decline? Project cost of capital (c) 10.0% Net investment cost (depreciable basis) $60,000 Number of cars washed 2,800 Average price per car $25.00 Fixed op. cost (excl. deprec.) $10,000 Variable op. cost/unit (i.e., VC per car washed) $5.375 Annual depreciation $20,000 Tax rate 35.0%