Reference no: EM131205828
On January 1, 20X1, Pujols Industries has the opportunity to invest in a project with an uncertain outcome. The product might be a hit and very profitable, or it might not. To put specific numbers to it, there is a 50 percent chance that the payoffs will be an annuity of $1,500 per year for three years. There is also a 50 percent chance that the payoffs will be an annuity of $500 per year for three years.
The payoff on December 31, 20X1 is when Pujols discovers whether the product is a hit or not. If the payoff is $1,500, then the other years will also be $1,500. If the payoff is $500, then the other years will also be $500.
Because Pujols does not know whether the product will be a hit or not, Pujols assigns 50/50 chances to the $1,500 and the $500.
The alternative use of money is to invest it at 10 percent.
One point of this exercise in an accounting class is that accounting is more-or-less intended to be that revelation at the end of each year that describes how the project is turning out.
a. What is the present value of the project?
b. As it happens, the land, building, and equipment have alternative uses, which means that anytime during the project Pujols could stop the project and turn to a new project (project 2). If numbers were put to it, Pujols anticipates that this possible other project has a present value of $1,600 as of the end of year 20X1. This means that Pujols would have the new project (project 2) worth $1,600 plus the $500 (or $1,500) outcome if they switched projects on December 31, 20X1. What is the present value as of January 1, 20X1 of the first project including the option to move to the new project (project 2) at the end of 20X1?
c. What is the value as of January 1, 20X1 of being able to opt out of this first project if it turns out to have a low payoff? The value of this option is the increase in present value of part b. compared to part a. I think this is sometimes called the value of the abandonment option.
|
Bonds of similar risk and maturity the market yield
: Federal Semiconductors issued 13% bonds, dated January 1, with a face amount of $690 million on January 1, 2016. The bonds sold for $644,005,394 and mature on December 31, 2035 (20 years). For bonds of similar risk and maturity the market yield was 1..
|
|
Amortizes bonds discount by the effective interest method
: Winner LTD. is authorized to issue $2 million of 3%, 10 year bonds payable. On December 31, 2014 when the market interest rate is 7% the company issues $1.6 million of the bonds. Winner LTD amortizes bonds discount by the effective interest method. T..
|
|
Which factor of the external environment influenced decision
: Identify which factors of the external environment influenced the company's decision. Pay close attention to customers, suppliers, competition, technology, socioeconomic trends, legislation, and economic trends.
|
|
Determine the current through the 10 ? resistor
: Write a program to determine the current through the 10-Ω resistor of given figure (for any component values) using superposition.
|
|
The increase in present value
: On January 1, 20X1, Pujols Industries has the opportunity to invest in a project with an uncertain outcome. The product might be a hit and very profitable, or it might not. What is the present value of the project? What is the value as of January 1, ..
|
|
What is its times-interest-earned
: Thomson Trucking has $13 billion in assets, and its tax ratio is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 3%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.
|
|
What is the role of the project client sponsor or customer
: Is project control different in an Agile project? What is the role of a project manager in controlling an Agile project? What is the role of the project client, sponsor, or customer at controlling project changes?
|
|
Calculate the stripper well selling price
: Calculate the stripper well selling price thatwill make the economics of selling at year 0 a break-even withabandonment at year 0.
|
|
Consider technology and how it influences decision making
: Discuss how technologies or information systems have contributed to the problem. Discuss how you will propose technology be implemented into the solution.
|