Expected NPV, standard deviation of NPV, coefficient of variation of NPV

4.) Klott Company encounters significant uncertainty with its sales volume and price in its primary product. The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget. The base case, best case, and worse case scenarios and probabilities are provided in the table below. What is Klott’s expected NPV, standard deviation of NPV, and coefficient of variation of NPV? (see attached chart)

NPV

5.) Foxglove Corp. is faced with an investment project. The following information is associated with this project: (see chart in attached file) The project involves an initial investment of $100,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value of $15,000. In addition, the company expects an initial increase in net operating working capital of $5,000 which will be recovered in year 4. The cost of capital for the project is 12%. What is the project’s net present value? (Round the final answer to the nearest whole dollar.)

"Expected" net-present value, and graph

6.) Avanti, Inc. is considering investing in a new telephone product. There is a 35% chance that it will cost $1 million to launch this new product. The probability is 65% that it will cost $1.4 million at the initial state. Once the product is introduced, there is a 60% probability that it will generate $1.2 million cash-flow every year for the next three years, and with probability 40% the cash-flow would be $900,000 annually for 3 years. Avanti’s cost of capital is 11.5%. Draw the tree, and compute the “expected” net-present value.

WACC

7.) Hillard Corp. wants to calculate its weighted average cost of capital (WACC). The company’s CFO has collected the following information: • The company’s long-term bonds currently offer a yield to maturity of 8% • The company’s stock price is $32 per share (Po=$32) • The company recently paid a dividend of $2 per share (Do=$2.00) • The dividend is expected to grow at a constant rate of 6% a year (g=6%) • The company pays a 10% flotation cost whenever it issues new common stock (F=10%) • The company’s target capital structure is 75% equity and 25% debt • The company’s tax rate is 40% • The company anticipates issuing new common stock during the upcoming year. What is the compa... click for more

NPV comparison between 2 projects

9.) The following cash flows are estimated for 2 mutually exclusive projects: (see attached chart) When is Project B more lucrative than Project A? (that is, over what range of costs of capital (k) does Project B have a higher NPV than Project A?) (Choose the best answer) (hint: calculate the crossover rate – the cost of capital that make the NPV of the 2 project equal)