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Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for 10 years. The company will have to provide product support expected to cost $100, 000 per year in perpetuity. Assume all profits and expenses occur at the end of the year.
a. What is the NPV of this investment if the cost of capital is 6%? Should the firm undertake the project? Repeat the analysis for discount rates of 2% and 12%.
b. How many IRRs does this investment opportunity have?
c. Can the IRR rule be used to evaluate this investment? Explain.
You have been asked to estimate the value of General Communications, a telecomm firm. General Communications has a debt to capital ratio of 30%, a beta of 1.10 and a pre-tax cost of debt of 7.5%. Assuming that the firm is in stable growth, and that t..
Consider the following financial statement information for the Ayala Corporation: Item Beginning Ending Inventory $ 11,600 $ 12,600 Accounts receivable 6,600 6,900 Accounts payable 8,800 9,200 Credit sales $ 96,000 Cost of goods sold 76,000 Calculate..
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A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,800 1 12,800 2 15,800 3 11,800 What is the NPV for the project if the required return is 10 per..
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When comparing option hedging (hedging with options) to futures hedging (hedging with futures), which statement is most true:
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