Posted: February 15th, 2021

1. 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 $22.1 million. If the DVDR fails, the present value of the payoff is $9.5 million. If the product goes directly to market, there is a 47 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.1 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 76 percent. The appropriate discount rate is 8 percent.

Required:

(a)

Calculate the NPV of going directly to market now. (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars. (e.g., 1,234,567))

(b)

Calculate the NPV of test marketing first. (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places. (e.g., 32.16))

2. You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

Sales price per abalone = $ 93.00

Variable costs per abalone = $ 5.90

Fixed costs per year = $ 690,000.00

Depreciation per year = $ 47,000.00

Tax rate = 33.00 %

The discount rate for the company is 11 percent, the initial investment in equipment is $329,000, and the project’s economic life is seven years. Assume the equipment is depreciated on a straight-line basis over the project’s life.

Requirement 1:

What is the accounting break-even level for the project? (Round your answer to the nearest whole number. (e.g., 32))

Requirement 2:

What is the financial break-even level for the project? (Round your answer to the nearest whole number. (e.g., 32))

3.

We are examining a new project. We expect to sell 3,000 units per year at $52 net cash flow apiece for the next 15 years. In other words, the annual operating cash flow is projected to be $52 × 3,000 = $156,000. The relevant discount rate is 18 percent, and the initial investment required is $670,000. Suppose you think it is likely that expected sales will be revised upward to 3,900 units if the first year is a success and revised downward to 1,500 units if the first year is not a success. The project can be dismantled after the first year and sold for $520,000.

Required:

(a) If success and failure are equally likely, the NPV of the project is ____$. Consider the possibility of abandonment in answering. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

(b) The value of the option to abandon is ___$. (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

4. You bought one of Bergen Manufacturing Co.’s 10 percent coupon bonds one year ago for $770. These bonds make annual payments and mature 10 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 14 percent. If the inflation rate was 3.1 percent over the past year, your total real return on the investment was ______ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))”

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