The CEO of Garneau Cinemas is considering making a movie and must decide between acomedy and a thriller-it doesn't have the production space to make both. The comedy isexpected to cost $20 million up front (at t = 0). After that, it is expected to make $11 millionin the first year (at t = 1) and $4 million in each of the following two years (at t = 2 and t =3). In the fourth year (at t = 5), it is expected that the movie can be sold into syndicationfor $2 million with no further cash flows back to Garneau Cinemas. The thriller is expectedto cost $45 million up front (at t = 0). After that, it is expected to make $25 million in thefirst year (at t = 1) and $4 million in each of the following four years (at t = 2, 3, 4, and 5).In the sixth year (at t = 6), it is expected that the movie can be sold into syndication for$30 million with no further cash flows back to Garneau Cinemas. The cost of capital is10%, and Garneau usually requires projects to have a payback within four years.Determine each project's payback and NPV, and advise the CEO what she should do.years, and the NPV of the comedy is $years, and the NPV of the thriller is $The payback for the comedy isThe payback for the thriller is(Round to two decimal places as needed.)million.million.

NPV stands for Net Present Value. It is a financial metric used to assess the profitability and…

Answered: The CEO of Garneau Cinemas is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Ang Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $34.3 million. If the HD DVD fails, the present value of the payoff is $12.3 million. If the product goes directly to market, there is a 50 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.33 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80 percent. The appropriate discount rate is 11 percent. Calculate the NPV of going directly to market and the NPV of test-marketing before going to market. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to nearest whole dollar amount, e.g., 1,234,567.).
Ang Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff at the time the product is brought to market) is $33.6 million if the HD DVD fails, the present value of the payoff is $116 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.26 million to test market the HD DVD Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 percent. Calculate the NPV of going directly to market and the NPV of test-marketing before going to market. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to nearest whole dollar amount, e.g.. 1,234,567) Go to market now Test marketing first Should the firm conduct test-marketing? O No 20,400,000 Yos
A design firm is considering investing in a software suite that costs $200,000. It estimates that the software will allow it to better present its design ideas and generate an additional revenue of $70,000 per year for each of the next 4 years. At the end of those 4 years, the firm will need to upgrade its software and the software suite would have negligible salvage value. Due to changes in the economy, the design firm is reevaluating its MARR - it is not sure whether it should be 9%, 12%, or 14%. Calculate the present worth at each of these MARRS, and determine for which values of the MARR the investment will be economically justified. Click here to access the TVM Factor Table calculator. PW(9%): 2$ PW(12%): $ PW(14%): Justified when MARR is %. Carry all interim calculations to 5 decimal places and then round your final answers for the PWs to a whole number and for the IRR to 1 decimal place. The tolerance is ±20 for the PWs and ±0.2 for the IRR.
Arrowroot Ltd is considering whether to invest in a machine that produces soft drink bottles now or in one year’s time. The machine costs $2 million and the bottles will be ready for sale immediately after the machine is purchased. The machine is expected to produce 1 million bottles per year forever. Currently, the bottle can be sold for $0.4 each but next year the price will change. If there is a high demand, the price for one bottle will be $0.6. If the demand is normal, the price will be $0.3 per bottle. If the demand is low, the price will be $0.1 per bottle. The probability of high demand is 0.3, the probability of normal demand is 0.2 and the probability of low demand is 0.5. The price will remain at this new level forever. Assume no taxes and the company’s cost of capital is 10 percent per annum. Should the company invest in the machine now or delay it by one year? Show all calculations. What is the value of the option to delay?
Shine Co. is looking at expanding its business to include Bitcoin Mining, and change their name to CoinCo. They will need to purchase $1,000,000 worth of mining machines. It is estimated that these machines will generate $1,000 in revenue per day. The machines will require 15 days of maintenance per year, during which time they will not produce any revenue. Shine Co. estimates that the machines will cost $100 per day of operation. CoinCo also has to pay a commission of 1 penny per dollar of revenue. CoinCo has a 7.5% cost of capital and a 25% tax rate. The machines can be sold for 25% of the original cost after 5 years. The machines will be depreciated using straight-line depreciation over 5 years.What is the project's:NPVIRRPAYBACK PERIODDISCOUNTED PAYBACK PERIODNET PAYBACK PERIOD
MaBak Inc. is considering buying a robotic assembly machine that will bring in an extra $28,000 per year in profit (after deducting costs for electricity, maintenance, etc.). The machine will last for 8 years; however, it will not have any resale value. MaBak Inc. has not priced robotic machines. Calculate the maximum price MaBak Inc. should pay if they want to earn an 10% return on any money invested in the company. Which table will you use for the above calculation? Number of periods? Interest Rate? Factor? What is the maximum price?
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…
Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $34.8 million. If the DVDR fails, the present value of the payoff is $12.8 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.38 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 percent. Calculate the NPV of going directly to market and the NPV of test marketing before going to market.
A medium-size consulting engineering firm is trying to decide whether it should remodel its office now or wait and do it one year from now. If thefirm does it now, the cost will be $38,000. The interest rate is 10% per year.a. What would the cost have to be one year from now to render the decision indifferent?b. If the cost one year from now is $41,600, should the firm remodel now or later?
Expando, Inc, is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three options.The first is a small facility that it could build at a cost of $6 million. If demand for new products is tow, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million.The third option is to outsource their production, it would cost them nothing. The company would expect to receive $1.6 million in discounted revenues if the demand was low and $3.1 million if the demand…
Lincoln Manufacturing is considering starting a new line of business with the excess capacity it currently has on its production line. The current line is expected to last five years at the current rate of production. However, if a new line of business is taken on, then the production line will have to be replaced in three years instead of five. The new production line will last six years and would cost $100,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 7 percent cost of capital. $16,006 $33,132 $17,126 $20,980
Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $17 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because…

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