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The XYZ firm can invest in a new DRAM chip factory for $425 million. The factory, which must be invested in today, has cash flows two years from now that depend on the state of the economy. The cash flows when the factory is running at full capacity are described by the following tree diagram:
In year 1, the firm has the option of running the plant at less than full capacity. In this case, workers are laid off, production of memory chips is scaled down, and the subsequent cash flows are half of what they would be when the plant is running at full capacity. An alternative use for the firm's funds is investment in the market portfolio. In the states that correspond to the branches of the tree above, $1 invested in the market portfolio grows as follows:
Assume that the risk-free rate is 5 percent per year, compounded annually. Compute the project's present value
(a) with the option to scale down and
(b) without the option to scale down. Compute the difference between these two values, which is the value of the option.
These cash flows include depreciation expenses. Calculate NPV and IRR for each machine and select the best choice for the MIT Whitehead Institute.
Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $50 per share. The number of outstanding shares at the time of the announcement was 82 million.
A boat leaves the entrance of a harbor and travels 57 miles on a bearing of N 11° E. How many miles north and how many miles east from the harbor has the boat traveled?
If 9% after-tax is investor's required return, what before-tax rate would domestic bond require to pay to give the required after-tax return?
What is noise trading? - What is herd behavior, and how can it lead to a bubble in a financial market?- Is the strategy these fund managers are using consistent with the efficient markets hypothesis?
although the net present value of the first 5 years cash flow is a positive 2.3 million the projects overall net cash
You have very good traders, who can execute trades at a cost of only 7.5 cents per transaction (15 cents round-trip) on a $30 stock. Does this strategy make sense?
Assume large-company stocks earned 11.4 percent over a period of years. Over that same period, the risk-free rate was 3.6 percent and the inflation rate was 3.2 percent. What was the risk premium on large-company stocks during this time period?
how much would you need to invest to get a return of 1.00 from an investment with a price per share of 36 with earnings
1. prepare the following budgets for 1 quarter broken down monthly regarding your chosen item estimated sales budget
a taxpayer completes 500 of accounting servicesin dec. 2012 for a client who pays him for the work in2013. what is the
"Which of the following statements, if any, is (are) correct? 1. Prepaid Tuition plans provide for the prepayment of college tuition at current tuition prices for future enrollment. 2. A disadvantage of a QTP (qualified tuition plan) is that the o..
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