You are the CFO of TRADETECH, a firm that produces handheld wireless trading modules, which allow...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are the CFO of TRADETECH, a firm that produces handheld wireless trading modules, which allow any (reckless) day-trader to trade from anywhere without the need of a personal computer. You are considering whether or not to embed a banking feature to the trading module so that investors can wire funds to and from their handheld immediately. Here is what your finance team has told you about this project. Today (Time 0), you just received the results of an external consultant report that provided the relevant forecasts. You have not yet paid for this report, but the invoice from the consultants say that you may delay your payment of $100 million until Time 1. . If you do NOT undertake the project, SALES of your company will be $240 million in Time 1 and will grow at 5% per year indefinitely after that. If you do undertake the project: o SALES at Time 1 and Time 2 will only be $200 million as customers delay purchasing while waiting for the new device. SALES at Time 3 will be $300 million and will grow at 5% per year indefinitely after that. o Development of the new module will require a purchase of a new ultra-secure financial supercomputer that costs $200 million at Time 0. The supercomputer will be straight-line depreciated to zero for tax purposes over 2 years (Time 1 and Time 2). Nonetheless, you expect to sell the used supercomputer at Time 2 for $30 million. o Marketing the new functionality will require an increase in your advertising budget (operating expense) by $15 million at Time 1 and by $20 million at Time 2 relative to what you would spend on advertising were you to not do the project. Whether or not you do the project, you also anticipate o COGS to be equal to 75% OF SALES. o Inventory to be equal to 50% of next year's COGS. o Your firm never has any accounts receivables or accounts payable. . This project is unlike any project that your firm has ever done, but you have identified a comparable firm, MONEYWIRE that is in the business of embedding banking features into portable devices. MONEYWIRE is an entirely equity financed firm that is publicly traded, and you note that MONEYWIRE's equity beta is 2.3. As CFO of TRADETECH, you know that TRADETECH's WACC is 14.5%. Your marginal tax rate on income is 40%. Your firm has enough other revenue to use any tax breaks generated by this project. Your marginal tax rate on capital gains is 20%. The risk-free interest rate is 2%, the market risk premium is 5%, and the CAPM is TRUE (enough for this problem). Using the NPV rule, should your firm develop the new project? You are the CFO of TRADETECH, a firm that produces handheld wireless trading modules, which allow any (reckless) day-trader to trade from anywhere without the need of a personal computer. You are considering whether or not to embed a banking feature to the trading module so that investors can wire funds to and from their handheld immediately. Here is what your finance team has told you about this project. Today (Time 0), you just received the results of an external consultant report that provided the relevant forecasts. You have not yet paid for this report, but the invoice from the consultants say that you may delay your payment of $100 million until Time 1. . If you do NOT undertake the project, SALES of your company will be $240 million in Time 1 and will grow at 5% per year indefinitely after that. If you do undertake the project: o SALES at Time 1 and Time 2 will only be $200 million as customers delay purchasing while waiting for the new device. SALES at Time 3 will be $300 million and will grow at 5% per year indefinitely after that. o Development of the new module will require a purchase of a new ultra-secure financial supercomputer that costs $200 million at Time 0. The supercomputer will be straight-line depreciated to zero for tax purposes over 2 years (Time 1 and Time 2). Nonetheless, you expect to sell the used supercomputer at Time 2 for $30 million. o Marketing the new functionality will require an increase in your advertising budget (operating expense) by $15 million at Time 1 and by $20 million at Time 2 relative to what you would spend on advertising were you to not do the project. Whether or not you do the project, you also anticipate o COGS to be equal to 75% OF SALES. o Inventory to be equal to 50% of next year's COGS. o Your firm never has any accounts receivables or accounts payable. . This project is unlike any project that your firm has ever done, but you have identified a comparable firm, MONEYWIRE that is in the business of embedding banking features into portable devices. MONEYWIRE is an entirely equity financed firm that is publicly traded, and you note that MONEYWIRE's equity beta is 2.3. As CFO of TRADETECH, you know that TRADETECH's WACC is 14.5%. Your marginal tax rate on income is 40%. Your firm has enough other revenue to use any tax breaks generated by this project. Your marginal tax rate on capital gains is 20%. The risk-free interest rate is 2%, the market risk premium is 5%, and the CAPM is TRUE (enough for this problem). Using the NPV rule, should your firm develop the new project?
Expert Answer:
Answer rating: 100% (QA)
To determine whether your firm should develop the new project we will calculate the Net Present Value NPV of the project and compare it to the cost of the project The NPV rule states that a project sh... View the full answer
Related Book For
Principles Of Information Security
ISBN: 9780357506431
7th Edition
Authors: Michael E. Whitman, Herbert J. Mattord
Posted Date:
Students also viewed these finance questions
-
A sandy silt soil extends 17 m down from the ground surface. Lab tests show the soil has a total unit weight of 18.8 kN/m3, a saturated unit weight of 20.3 kN/m3 and an effective particle diameter of...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Multiple Choice Questions 1. Direct materials are not usually easily traced to a product. A) True B) False 2. Product costs can be classified as one of three types: direct materials, direct labor, or...
-
Modify Prob. 6.91 so that the angle β is unknown. For SAE 10 oil at 20°C, if the pressure drop is 120 kPa and the flow rate is 4 m3/h what is the proper value of the angle β, in...
-
Can you think of any other MNEs that can collaborate successfully with the Grameen Foundation and help solve specific problems in Bangladesh? How can they do this?
-
A safety-rated smart logic module might include what basic functionality?
-
Perez County entered into a number of transactions for the current fiscal year. Identify the fund or funds affected by each transaction and determine how each transaction will affect the accounting...
-
If you worked for one of the oil companies and were tasked to negotiate an oil contract with the Nigerian government, how would you go about it? What would you recommend your company do? Why?
-
Given two arrays each of length n, arr1, and arr2, in one operation, any two elements of an array can be swapped. This can occur any number of times. Find the maximum possible sum of i*(arr2[1]-...
-
How are pay levels and pay grades related and used as part of a companys compensation and benefit package?
-
Who is the author who tells us about an evaluation process such as; Respond to the needs of the audience, illuminate teaching-learning processes, be relevant to public decision-making? Select one:...
-
What is the annual payment? If the loan is paid off early, at the end of the third year, what would the payment be? Loan 250,000 Loan term 5 years Interest rate 4.04% The loan in question is a term...
-
The most recent annual filings for American Airlines and Samsung Electronics in Form 10-K to answer the questions below: Determine the following for each company: A product description A product...
-
What will be the output of the below program when it is run? def addFuzz(list_arg): return_list = [] for item_str in list_arg: return_list.append(item_str + 'Fuzz') return return_list names [John',...
-
a. Give two examples of how bonds and stocks are different. b. Explain a bond's face value. C. What are typical maturities for bonds? d. Explain the difference between municipal and corporate bonds....
-
The series (1)" - n=0 (A) cos(x) (B) cos(2x) (C) sin(x) (D) sin(2x) 2n 4" is a Maclaurin series for the following function (2n)!
-
Select a mass spectrometric technique with the highest mass resolution for identifying an unknown compound being eluted from a liquid chromatography column
-
Compare and contrast the differences between a CISO and CSO. Depending on the organization, the CISOs position may be combined with physical security responsibilities or may even report to a security...
-
Contrast that, like the CISSP, the SSCP certification applies more to the security manager than the security technician because the SSCP focuses on practices, roles, and responsibilities as defined...
-
Describe power irregularities: irregularities from power utilities are common and can lead to fluctuations, such as power excesses, power shortages, and power losses. In the United States, we are fed...
-
A stock price is governed by \[\frac{\mathrm{d} S}{S}=\mu \mathrm{d} t+\sigma \mathrm{d} z\] where \(z\) is a standardized Wiener process. Interest is constant at rate \(r\). An investor wishes to...
-
The current price of gold is \(\$ 412\) per ounce. The storage cost is \(\$ 2\) per ounce per year, payable quarterly in advance. Assuming a constant interest rate of \(9 \%\) compounded quarterly,...
-
At the beginning of April one year, the silver forward prices (in cents per troy ounce) were as follows: The carrying cost of silver is about 20 cents per ounce per year, paid at the beginning of...
Study smarter with the SolutionInn App