Exercices de finance (document en anglais)

Problems Chapter 13

13-7 New-Project Analysis You have been asked by the president of your company to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MARCS 3-year class, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%.

a. What is the Year-0 net cash flow?

b. What are the net operating cash flows in Year 1, 2, and 3?

c. What is the additional (nonoperating) cash flow in Year 3?

d. If the project’s cost of capital is 10%, should the chromatograph be purchased?

13-11 Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the project’s NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company’s CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis:

Economic Scenario Probability of Outcome NPV

Recession 0.05 -$70 million

Below average 0.20 -25 million

Average 0.50 12 million

Above average 0.20 20 million

Boom 0.05 30 million

What is the project’s expected NPV, its standard deviation, and its coefficient of variation?

13-17 Decision Tree The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the “winged” keels first introduced on the 12-meter yacht that raced for the America’s Cup.

First, YYC would have to invest $10,000 at t = 0 for the design and model tank testing of the new boat. YYC’s managers believe there is a 60% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value.

The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost $500,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for $100,000. The managers estimate the probability is 80% that the boats will pass testing and that Stage 3 will be undertaken.

Stage 3 consists of converting an unused production line to produce the new design. This would cost $1 million at t = 2. If the economy is strong at this point, the net value of sales would be $3 million; if the economy is weak, the net value would be $1.5 million. Both net values occur at t = 3, and each state of the economy has a probability of 0.5. YYC’s corporate cost of capital is 12%.

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