If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake

The problem has to be in Excel. Your brother is requesting a $10,000 loan from you. He says he’ll repay you in a year with $12,000 in payments. What is this investment opportunity’s NPV if the cost of capital is 10%? Should you go ahead and make the investment? Calculate the IRR and use the results to establish the cost of capital estimate’s maximum permitted deviation before making a decision. 8. You’re thinking about investing in a clothing distributor. The business requires $100,000 now and anticipates paying you back $120,000 in a year. What is the investment opportunity’s IRR? Your cost of capital is 20% due to the investment opportunity’s risk. What does the IRR rule say about making an investment? 19. You are a real estate agent who is considering posting a sign at a nearby bus stop to promote your services. $5,000 will be spent on the sign, which will be up for a year. You anticipate that it will bring in an extra $500 per month in revenue. What is the time to payback? You must choose between two investing options that are mutually exclusive. Both require a $10 million upfront commitment. At the conclusion of the first year, Investment A will produce $2 million annually in perpetuity. At the conclusion of the first year, Investment B will generate $1.5 million, and each year following that, its earnings will increase by 2%. Which investment has the greater IRR? b. With a 7% cost of capital, which investment has the better NPV? Choosing the investment with the larger IRR in this situation gives the right response as to which investment is the better opportunity, but for what values of the cost of capital? Chap. 8 (pp. 260–262) 1. Frozen pizza vendor Pisa Pizza is thinking of releasing a version of its pizza that is trans fat-free and low in cholesterol. The company anticipates $20 million in annual sales for the new pizza. While many of these sales will be to brand-new clients, Pisa Pizza predicts that 40% of them will come from clients who choose the new, healthier pizza over the traditional one. a. Pretend that customers will spend the same amount on both versions. What percentage of extra sales is the new pizza expected to generate? b. Assume that if Pisa Pizza does not introduce a healthier pizza, 50% of the customers who will move from the original pizza to its healthier pizza will switch to another brand. What percentage of extra sales is this new pizza’s introduction expected to generate? 6. A cellular telephone service business named Cellular Access, Inc. recorded net income of $250 million for the most recent fiscal year. The company had no interest payments, $200 million in capital expenditures, and $100 million in depreciation costs. A $10 million increase was made to working capital. Determine Cellular Access’s free cash flow for the most recent fiscal year. 12. A bicycle producer presently turns out 300,000 units annually and anticipates constant output levels in the future. It pays $2 per chain to an outside vendor to purchase chains. The factory manager thinks that manufacturing these chains would be less expensive than purchasing them. The projected direct in-house production expenses per chain are only $1.50. The required equipment would cost $250,000 and would become outdated in ten years. A 10-year straight-line depreciation schedule would allow this investment to be taxed at its full value. The plant manager calculates that the operation will need $50,000 in inventory and other working capital up front (year 0), but he or she argues that this amount may be disregarded because it will be recouped at the conclusion of the ten years. After ten years, $20,000 is projected in earnings from dismantling the equipment. What is the net present value of the choice to create the chains internally rather than buying them from the supplier if the company pays tax at a rate of 35% and the opportunity cost of capital is 15%?



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