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You are responsible for constructing a new building. The building will have 7 floors. You are considering modifying the design of the structure with extra steel, utilities, and elevator shafts so that it will be easier to double the height of the building to 14 floors (after the building is constructed). You need to decide whether to modify the design of the building before the building is constructed. When the building is built with 7 floors, there will either be 7 occupants or 4 occupants. There is a 0.56 probability that there will be 7 occupants. If there are 4 occupants, your company will never choose to make the building taller. If there are 7 occupants, your company may decide to double the height of the building (to 14 floors). There is a 0.39 probability the building will have 14 total occupants and a 0.61 probability the building will have 11 total occupants. The revenue for the company depends on the number of occupants in the building: the revenue for 4, 7, 11, and 14 occupants is $4, $7, $11, and $14, respectively. NOTE: If there are originally 7 occupants and the building's height is doubled, assume the revenue of the company is either $11 or $14 . DO NOT ADD $7 +$11 or $7 +$14. The cost for the company depends on whether the design is modified and whether it chooses to double the height of the building. The cost to modify and double the height is $10. The cost to modify the building and not double its height is $7. The cost to double the height without modifying the design is $13. The cost of neither modifying or doubling the height is $3. Your company wants to maximize its expected profit (where profit is the revenue gained from the occupants minus the cost). What is the expected profit for the optimal option, rounded to the nearest tenth of a dollar? This includes whether or not to modify the design and wether or not to double the height
Tim Brown of Omega Drycleaners is planning to invest in a new dry cleaning machine worth $80,000. The life of the machine is estimated to be 12 years and at the end of this period the manufacturer will pay $10,000 for the old machine. The incremental..
Which company is likely to have the higher enterprise-value-to-EBITA multiple? Why?
What is the value today of $5,000 per year, at a discount rate of 9 percent, if the first payment is received 5 years from today and the last payment is received 15 years from today?
Payments on the loan are $772.02 per month. Suppose now the interest rate is 15% annual, what is the market value of the loan for the remaining 15 years?
NPV Calculate the net present value (NPV) for the following 15-year projects.
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $590. They have 10 years remaining to maturity. The annual inter..
Determine the annualized rate of return she earns over 180 days and compare it to the annualized rate of return on the 180-day CD.
Explain how a net present value (NPV) profile is used to compare projects. How does this compare to internal rate of return (IRR)? How does reinvestment affect NPV and IRR?
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be w..
A $1,000 par value bond with 12 years to maturity pays a coupon rate of 5.5%, annually. What is the expected annual return over the next three years?
You have decided to advance refund $10,000,000 of outstanding debt that is callable in five years. The interest rate on these bonds is 8 percent. You can issue new bonds at 6 percent. For every dollar of new debt issued, you will incur a 5 percent is..
Bradford Manufacturing Company has a beta of 1.3, while Farley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 10.5%. The risk-free rate of interest is 6.5%. By how much does Bradford's requir..
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