(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?

 


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This question was answered on: May 23, 2022

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