Compute the projects present value

Assignment Help Financial Management

Reference no: EM131864869

12.2,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 theplant 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 peryear, 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.

Reference no: EM131864869

Questions Cloud

What are the ramifications if test fails or is not performed : What tools are used to perform the test? Who are the stakeholders for the test? What are the ramifications if this test fails or is not performed?

Violating health regulations and laws regarding technology : Determine how violating health regulations and laws regarding technology could impact the security of the health information in the institution.

What professional organizations might you join : Write a 1-page paper discussing what professional organizations might you join, and what websites might you visit that would provide insight into a career.

Determine the elements to research for amazon : Determine the elements to research for Amazon to expand globally. If the Amazon is already global, determine the elements to research to improve their global.

Compute the projects present value : Assume that the risk-free rate is 5 percent peryear, compounded annually. Compute the project's present value

Develop a data-flow diagram of one of its main processes : Develop a data-flow diagram (DFD) of one of its main processes and an entity-relationship diagram showing the data within the scope of the system.

What are the constraints on this residual frequency error : Show that pilot symbols can be used to track both fading and small residual frequency errors in receiver. What are constraints on this residual frequency error?

What does the flow theory suggest will happen to the value : If a country has a trade deficit, what would we expect of the balance of its financial and capital accounts on the country's balance of payments?

What is the maximum frequency error that would be permitted : If the maximum phase rotation permitted is 10°, what is the maximum frequency error that would be permitted as a fraction of the symbol rate?

User Account

All Pages