A British brewing company is currently considering entering the Utrecht market with a pilot project having...
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A British brewing company is currently considering entering the Utrecht market with a pilot project having an investment cost of 20 million euros. The present value of the pilot's expected operating cash flows (OCFS) amounts to 19 million euros. If the pilot phase is successful, the company will proceed with a large-scale launch across the Netherlands. This follow-up project might be launched 3 years after the start of the pilot. The follow-up project's annual volatility is equal to 26%. The investment cost for the follow-up project is 30 million euros, while the present value of the follow-up project's operating cash flows (OCFS) is equal to 25 million euros. The continuous risk-free interest rate is 2%, the company's cost of capital 14% and its cost of borrowing 8%. It is financed according to a long-term target debt-to-equity ratio in market value of 1. The company is in 30% tax bracket, has a double B bond rating and is listed on the London Stock Exchange. A comparable all-equity financed firm has a cost of capital 16.47%. You can round calculations to two digits after the integer 1) Visualize the two phases of this project on an option map along two dimensions (Value and uncertainty). Calculate and explain. 2) Using financial tables, calculate the value of phase 2. 3) Should the company proceed with the pilot project? Calculate and explain. A British brewing company is currently considering entering the Utrecht market with a pilot project having an investment cost of 20 million euros. The present value of the pilot's expected operating cash flows (OCFS) amounts to 19 million euros. If the pilot phase is successful, the company will proceed with a large-scale launch across the Netherlands. This follow-up project might be launched 3 years after the start of the pilot. The follow-up project's annual volatility is equal to 26%. The investment cost for the follow-up project is 30 million euros, while the present value of the follow-up project's operating cash flows (OCFS) is equal to 25 million euros. The continuous risk-free interest rate is 2%, the company's cost of capital 14% and its cost of borrowing 8%. It is financed according to a long-term target debt-to-equity ratio in market value of 1. The company is in 30% tax bracket, has a double B bond rating and is listed on the London Stock Exchange. A comparable all-equity financed firm has a cost of capital 16.47%. You can round calculations to two digits after the integer 1) Visualize the two phases of this project on an option map along two dimensions (Value and uncertainty). Calculate and explain. 2) Using financial tables, calculate the value of phase 2. 3) Should the company proceed with the pilot project? Calculate and explain.
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1 The two phases of the project can be visualized on an option ... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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