What is the npv of your investment project given

Assignment Help Financial Management

Reference no: EM132014146

Suppose you have the opportunity to invest in a second-hand machine for $100M, and you are unsure of its quality. There is a 75 percent chance it will be high quality, and a 25 percent chance it will be low quality.

If it is high quality, its production will yield you $180M with 60 percent probability, and $140M with 40 percent probability.

If it is low quality, its production will yield you $80M or $40M, with equal probability. The machine stops working at t=1, regardless of the quality. You observe the output of the machine and thus you will know the quality of the machine at t=1. Similar projects of similar risk have a required rate of return of 10 percent.

a) What is the expected NPV from this project?

Suppose you also get a maintenance warranty with your purchase. At t=1, you can pay another $50M to keep the machine going for another period. At t=2, the machine will yield you $90M with 60 percent probability, and $70M with 40 percent probability if the machine is high quality. The machine will yield you $40M or $20M with equal probability if the machine is low quality.

b) At t=1, would you want to pay to keep the machine going for another period if the machine was high quality? What about if the machine was low quality?

c) What is the NPV of your investment project given your choices in part (b)?

d) Suppose you had to pay for the maintenance warranty at time t=0. What is the maximum you would be willing to pay for it?

Reference no: EM132014146

Questions Cloud

Draw a sketch and explain the working of Oldham coupling : Draw a sketch and explain the working of Oldham's coupling. What do you mean by degree of freedom of a kinematic pair? Explain with example

Prepare an incremental analysis and conclude : New machine can produce income of $350,000 at lower operating cost of $160,000 per year for 7 years (from year 1 to year 7).

Sample of carbon from rolls of parchment : A 1.00 g sample of carbon from rolls of parchment found near the dead sea undergoes 1.4 x 10 * 4 decay of carbon-14 in 20 h. What is the approximate time

Chemical equilibrium principles : Explain using chemical equilibrium principles why this makes breathing CO hazardous.

What is the npv of your investment project given : d) Suppose you had to pay for the maintenance warranty at time t=0. What is the maximum you would be willing to pay for it?

Balanced equation for this reaction look like : When heated to 700-800 celsius, diamonds, which area pure carbon, are oxidized by atmospheric oxygen. What would a balanced equation for this reaction look like

Calculate the present value of the three payments : Suppose one day you were driving along a familiar county road a few hours after a torrential rain storm. All the creeks are full or over-flowing their banks.

What is the molarity of the original hf solution : A 10.00 mL sample of a solution of hydrofluoric acid, HF, is diluted to 500 mL. A 20.00 mL sample of the diluted solution requires 13.51 mL

Explain hart mechanism with a neat diagram : Describe the working and expression for correct steering of Devi's steering gear mechanism. Explain Hart mechanism with a neat diagram

User Account

All Pages