Exam 11: How to Ensure That Projects Truly Have Positive Npvs

A firm that expects long-run economic rents from a particular project is likely ignoring the effects of competition.

Since gold is held as an investment but pays no cash dividends, today's price equals the present value of its forecasted future price.

Briefly explain the effect of building new manufacturing plants on the firm's existing plants.

The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume no taxes.)If the salvage value at the end of year 2 is $40,000, would you scrap the plant at the end of year 2?

Suppose the current price of gold is $650 per ounce. The price of gold is expected to grow at 5 percent per year for the foreseeable future. If the appropriate discount rate is 8 percent, the present value of gold is

Discuss how you would react if you were presented with a project that had a high positive NPV.

The use of certainty-equivalent cash flows can help in the following ways: I.there is no need to estimate future prices; II.there is no need to estimate the discount rate; III.there is no need to estimate the quantity of commodity produced

Briefly explain the advantage and the disadvantage of a high salvage value for a project.

Which of the following is an example of a strategic asset?

Allen Technology Company is currently valued at $400 million. It is proposing a new plant with a net present value of $200 million. However, the new plant will reduce the value of one of its existing plants by $50 million. What is the value of the company if it invests in the new plant?

What is the total net present value (NPV)of an expansion plan?

Goldsmith Labs recovers gold from printed circuit boards. It has developed new equipment for this purpose. You have the following data. (1)The equipment costs $250,000. (2)It costs $200,000 per year to operate. (3)It has an economic life of five years and is depreciated using the straight-line method. (4)It will recover 300 ounces of gold per year. (5)The current price of gold is $900 per ounce. (6)The tax rate is 30 percent. (7)The cost of capital is 8 percent. What is the NPV of installing this equipment?

The annual demand (in millions)for golf balls is given by the equation: Demand = 6 × (5 − price). If the price of a golf ball is $3, what is the annual demand for golf balls?

Briefly explain the concept of economic rent.

While evaluating a project, an analyst should consider its effect upon the sales of the firm's existing products.

One can determine the present value of risky cash flows by estimating I.the expected cash flows and then discount these at a rate that is consistent with the risk of the cash flows; II.the certainty-equivalent cash flows and then discount these at the risk-free rate; III.the expected cash flows and then discount these at the risk-free rate

The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: + $$43,300; and year 3: +$58,300. (Assume no taxes.)If the discount rate is 20 percent, what is the value of the plant at the end of year 2? Round to the nearest $100.

The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume there is no tax.)If the salvage value of the plant at the end of year is $66,700, would you scrap the plant at the end of year 1?

USGOLD Company has an opportunity to invest in a gold mine. The initial investment is $250 million. Analysts estimate that the mine will produce 100,000 ounces of gold per year for the next 10 years. The extraction cost of gold is $150 per ounce and is expected to remain at that level. The current price of gold is $600 per ounce and is expected to increase 4 percent per year for the next 10 years. What is the NPV of the project at a discount rate of 10 percent? (Ignore taxes.)

The annual demand (in millions)for baseballs is given by the equation: Demand = 10 × (4 − price). If the price of baseballs is $1.50, what is the annual demand for baseballs?