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
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
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,
require a $10 million outlay at the end of Year 2. Project Y would then be sold
company at a price of $20 million at the end of Year 3. Martin’s WACC is 11
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?
Cotner Clothes Inc. is considering the replacement of its
depreciated knitting machine. Two new models are available: Machine 190-3, which
a cost of $190,000, a 3-year expected life, and after-tax cash Fows (labor savings
depreciation) of $87,000 per year; and Machine 360-6, which has a cost of
6-year life, and after-tax cash Fows of $98,300 per year. Assume that both projects
repeated. Knitting machine prices are not expected to rise, because inFation will be
by cheaper components (microprocessors) used in the machines. Assume that
WACC is 14 percent. Should the ²rm replace its old knitting machine, and, if so,
new machine should it use?
This question was answered on: May 23, 2022
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