Where there is small probability of high annual inflation

Assignment Help Financial Management
Reference no: EM131550950

"Your company is considering investing in a country that usually has manageable inflation, but where there is a small probability of high annual inflation (more than 20%). If the company invests in the country, it will spend $1281 immediately, and the investment will last 6 years. The net cash flow in ACTUAL dollars from year 1 through year 6 follows a beta distribution with alpha = 1, beta = 1, A = 460, and B = 544. (When alpha = 1 and beta = 1 in a beta distribution, the distribution is identical to a uniform distribution.) Each year's cash flow follows the same distribution and is independent of the other years. (In other words, you need 6 beta random variables, one for each year.) The general inflation rate is also uncertain. The inflation rate follows a lognormal distribution, where the 50th %ile = 0.04 and the 0.9th %ile = 0.12 where the inflation rate is expressed as a decimal (not as a percentage). Assume the inflation rate remains the same in each year. Use SIPmath with 100000 trials to calculate the probability that the inflation-free rate of return will be less than the company's inflation-free MARR of 16%. Express your answer as a probability between 0 and 1."

Reference no: EM131550950

Questions Cloud

Employer is reviewing the acquisition of new machine : Your employer is reviewing the acquisition of a new machine. Should it make the investment and why or why not?
Long term debt capital to help finance these loans : Sumitomo Bank wants to expand its lending in the United States, but to do so it needs to raise more long term debt capital to help finance these loans.
What has happened to the prices of bonds : What has happened to the prices of xYZ bonds compared with the prices the day they were issued?
What coupon rate should xyz corp set on its bond : What coupon rate should xyz corp set on its bond so that it could be issues at par?
Where there is small probability of high annual inflation : "Your company is considering investing in a country that usually has manageable inflation, but where there is a small probability of high annual inflation.
Sales charges and fees associated with buying mutual funds : What are the sales charges and fees associated with buying mutual funds? What is interest-rate risk and how is it measured?
Considering two projects for inclusion in capital budget : Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis.
What is initial investment outlay for the spectrometer : What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?
Projects by using the npv decision rule : A firm evaluates all of its projects by using the NPV decision rule.

Reviews

Write a Review

Financial Management Questions & Answers

  What is the amount of the firms current assets

Killer Whale, Inc. has the following balance sheet statement items: total current liabilities of $693186; net fixed and other assets of $1832451; total assets of $3472745; and long-term debt of $806548. What is the amount of the firm's current assets..

  How much cash flow before tax and interest is necessary

How much cash flow before tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm's tax rate is 35%?

  Calculate the mortgage constant-annual debt service

You borrow $75,000 for 30 years at 11% interest compounded annually. The value of the property is $100,000, PGI= $20,000, vacancy rates are 8%, and operating expenses are $81,000. Calculate the mortgage constant. Calculate the annual debt service.

  Independent of the political process in the united states

"Because the Fed does not have to ask Congress for money to fund its operations, the principal-agent view of the Fed's motivation cannot be correct."

  Minimum estimated value of synergistic benefits from merger

what is the minimum estimated value of the synergistic benefits from the merger?

  Globalism trend affect cost and benefit analysis

Can ethics as it relate to technology be taught at CanGo? Why or why not? How does the globalism trend affect CanGo cost/benefit analysis?

  What is project net present value if required rate of return

A project is expected to create operating cash flows of $29,500 a year for three years. The initial cost of the fixed assets is $61,000. These assets will be worthless at the end of the project. An additional $4,500 of net working capital will be req..

  Correlation between the returns of the two stocks

Based on the following information determine the covariance and correlation between the returns of the two stocks.

  Assume compound interest for whole years

Suppose that you borrow $2900 on April 26, 2003 at an effective rate of 8.1 percent. If you make no payments, how much will you owe on June 13, 2008?

  New company is expected to growth exponentially

If a new company is expected to growth exponentially and pay dividends of $2, $3, and $4.5, for the first 3 years, respectively. After that time the growth is expected to be at 4% thereafter. The required rate of return is 8%. Find the value of the s..

  To finance a certain project a company must borrow money

To finance a certain project, a company must borrow money at 10 percent interest. How should it treat interest payments when it analyzes the project's cash flows?

  Reinforce the argument that financial markets are efficient

Which of the following tend to reinforce the argument that the financial markets are efficient?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd