What is the npv of the project assuming no taxes

Assignment Help Financial Management

Reference no: EM131936199

Consider the case of Ajax Manufacturing which just completed an R&D project on widgets that required a $70 million bond obligation. The R&D effort resulted in an investment opportunity that will cost $75 million and generate cash flows of $85 million in the event of a recession ( prob. = 20%) and $150 million if economic conditions are favorable ( prob. = 80%). What is the NPV of the project assuming no taxes, no direct bankruptcy costs, risk neutrality, and a risk-free interest rate of zero? Can the firm fund the project if the original debt is a senior obligation that doesn’t allow the firm to issue additional debt?

Assume now that if Ajax Manufacturing uses a more capital-intensive manufacturing process, it can produce a greater number of widgets at a lower variable cost.

Given the greater fixed costs, the cash flows are only $5 million in an unfavorable economy with the capital-intensive process but are $170 million in a favorable economy. Hence, equity holders would receive $100 million in the good state of the economy ($170 million ? $70 million) and zero in a recession because $5 million is less than the $70 million debt obligation. Can the firm issue equity to fund the project?

Reference no: EM131936199

Questions Cloud

Write marketing strategy for spingig company : 2 page Marketing strategy in terms of Positioning, Targets and Geography for SpinGig company. Article regarding company given below.

Describe how to account for the events and costs incurred : Describe how to account for the events and costs incurred each year. Provide appropriate journal entries - Prepare general journal entries to account

Potential differences in student learning : You are interested in examining any potential differences in student learning (i.e., post-test minus pre-test) that may be due to the number of days of teacher

Relationship between gre total scores and gpa : A researcher asks the question "Is there a relationship between GRE total scores and GPAs in the master's programs in electrical engineering?"

What is the npv of the project assuming no taxes : What is the NPV of the project assuming no taxes, no direct bankruptcy costs, risk neutrality, and a risk-free interest rate of zero?

Create a list of recommended team member : Imagine that you are a new manager responsible for the IT team in a start-up company that provides hosting services for online storefronts.

What would probably change these values in real life : what would be the present value of the lifetime income for each major? What would probably change these values "in real life"?

Prepare mock-ups of at least three significant screens : Your team should prepare mock-ups of at least three significant screens of your application (not login or language choice).

Why is customer lifetime value an effective focus : Why is customer lifetime value (CLV) an effective focus for long-term business success? Provide an example of how Evo could apply customer lifetime value.

User Account

All Pages