(Solution) 13-1-Martin Development Co. Is Deciding Whether To Proceed With Project X. The Cost Would Be \$9 Million In Year 0. There Is A 50 Percent Chance That... | Snapessays.com

(Solution) 13-1-Martin Development Co. is deciding whether to proceed with Project X. The cost would be \$9 million in Year 0. There is a 50 percent chance that...

Please help me understand the the two problems attached with step by step solution.thank you.13-1-Martin Development Co. is deciding whether to proceed with Project X.

The cost would be \$9 million in Year 0. There is a 50 percent chance that X

would be

hugely successful and would generate annual after-tax cash Fows of \$6

million per year

during Years 1, 2, and 3. However, there is a 50 percent chance that X would

be less

successful and would generate only \$1 million per year for the 3 years. If

Project X is

hugely successful, it would open the door to another investment, Project Y,

that would

require a \$10 million outlay at the end of Year 2. Project Y would then be sold

to another

company at a price of \$20 million at the end of Year 3. Martin’s WACC is 11

percent.

a. If the company does not consider real options, what is Project X’s NPV?

b. What is X’s NPV considering the growth option?

c. How valuable is the growth option?

13-3

Replacement chain

Cotner Clothes Inc. is considering the replacement of its

old, fully

depreciated knitting machine. Two new models are available: Machine 190-3, which

has

a cost of \$190,000, a 3-year expected life, and after-tax cash Fows (labor savings

and

depreciation) of \$87,000 per year; and Machine 360-6, which has a cost of

\$360,000, a

6-year life, and after-tax cash Fows of \$98,300 per year. Assume that both projects

can be

repeated. Knitting machine prices are not expected to rise, because inFation will be

o±set

by cheaper components (microprocessors) used in the machines. Assume that

Cotner’s

WACC is 14 percent. Should the ²rm replace its old knitting machine, and, if so,

which

new machine should it use?

Solution details:
STATUS
QUALITY
Approved

This question was answered on: May 23, 2022

Solution~00021147602284.zip (25.37 KB)

This attachment is locked

Our expert Writers have done this assignment before, you can reorder for a fresh, original and plagiarism-free copy and it will be redone much faster (Deadline assured. Flexible pricing. TurnItIn Report provided)

STATUS

QUALITY

Approved

May 23, 2022

EXPERT

Tutor