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You are considering an investment in a new sub-industry of interest to your firm. To understand the importance of terminal value assumptions you have decided to calculate NPV under two different sets of assumptions. The project requires an initial outlay of $ 200,000. In addition, after-tax cash flows for years one through six will be $ 25,000 per year. The appropriate discount rate for this project is 12 percent. To deal with the projects terminal value you are considering two potential methods of modifying the end-of-year-six cash flow.
i. Assume the end-of-year seven cash flow is 1 percent larger than the end-of-year-six cash flow. The cash flows will continue to grow in perpetuity at a constant rate of 1 percent thereafter.
ii Assume the project can be liquidated at the end of year six (after receiving the end-of-year-six cash flow) to net an additional after-tax-cash inflow of $ 65,000.
a. Calculate the project NPV assuming i.
b. Calculate the project NPV assuming ii.
c. Interpret your answers to a and b. In your discussion, clarify how the assumptions must coincide with management decisions.
A machine cost $60,200; it has an estimated residual value of $6,000 and an expected life of 300,000 units. What would be the depreciation in year three if 60,000 units were produced? Calculate the mean stitching time and the standard deviation to th..
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Relevant incremental cash flows include:
The real risk-free rate is 3.5%. Inflation is expected to be 1.75% this year and 4.75% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury secur..
assessment for the interim assessment of international financial managementyou are required to prepare a report of 2500
Simtek currently pays a $2.50 dividend (D 0 ) per share. Next year’s dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for 3 years and a 6 percent annual rate thereafter. What is t..
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An analysis of the financial issue and a comparison with the theory studied in class. Consider how financial theory applies/ doesn't apply/ partially applies to the article and comment on the similarities and discrepancies.
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