What is the npv of investing into the machine

Reference no: EM132048222

Question: When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma. The project involved a production of new type of shipping containers, which were significantly more durable and had a considerably longer useful life compared to conventional containers used in the industry. The year was 2009, and the equipment necessary for producing the containers was being sold for $900K. Each year, this cost is expected to increase by 20%. The useful life of the equipment and the project is 5 years. Mr. Johnson estimated that during a good year, the project will generate net cash flows of $600K per year, while during a bad year, the project will lose money, with an expected net cash flow of $-200K per year.

Because the economy suffered a significant decline just a year prior, there was uncertainty about the economy in general, and, very much affected by the economy, the demand for shipping and containers. Market analysts predicted that uncertainty will remain in 2010 and at this point, in 2009, the likelihood of 2010 being a good year is estimated at 40% and the likelihood of 2010 being a bad year is estimated at 60%. However, all uncertainty will get resolved in 2011. The likelihood of 2011 and all subsequent years being good years (recovery) is 30%, and the likelihood of these subsequent years being bad years (recession) is 70%.

Since he has not dealt with uncertainty regarding the future state of the economy before, Mr. Johnson is bewildered and asks your help in determining the course of action regarding this opportunity. Mr. Johnson has estimated that the WACC for the company in certain times has been 10%. Assume that the project has no tax implications, i.e. the tax rate of 0%.

a) What is the NPV of investing into the machine in 2009? __________________

b) What is the NPV (in year 2009) of delaying the investment until 2010? __________________

c) Should the firm invest in the project in 2009, 2010, or not invest at all? __________________

d) Assume that the firm has the possibility to invest in 2009 only. What is the value of knowing in 2009 with certainty the state of the world in 2010, with regards to this project? In other words, what is the maximum amount of money the company would pay to know in 2009 whether 2010 would be a good or a bad year? Explain your answer. ? __________________

Reference no: EM132048222

Questions Cloud

What must be the amount of common stock : You are preparing a 2015 balance sheet for Cornell Corp. based on the following information: cash = $141694; patents and copyrights = $625627.

Explain your understanding of that sub-field of sociology : Choose and identify this sub-field in sociology: Soc. of Race & Ethnicity. Explain your understanding of that sub-field of sociology above.

World first mouse cannonball : Mickey, a daredevil mouse of mass 0.0199 kg, is attempting to become the world's first "mouse cannonball."

How fast must he be moving as he leaves the water vertically : How fast must he be moving as he leaves the water vertically in order to jump to a height of 1.70 m? Ignore air resistance.

What is the npv of investing into the machine : When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma.

Compute the cost of goods destroyed : Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Compute the cost of goods destroyed

Perfrom an analysis on the humane society : Perfrom an analysis on the humane society you can use any website pertaing to the humane society: any and all infomration helps. this can just be a list.

Direction of the incoming ball as the positive direction : Neglect the weight of the bat, since it is so much less than the force of the bat. Choose the direction of the incoming ball as the positive direction.

Center of mass of the particles remains stationary : In other words, the center of mass of the particles remains stationary, even though each particle is moving. Find the ratio m1/m2 of the masses of the particles

User Account

All Pages