Question
Mars Technologies is considering setting up a plant in a foreign country. The plant will have an estimated useful life of four years and the
Mars Technologies is considering setting up a plant in a foreign country. The plant will have an estimated useful life of four years and the estimated costs of setting it up are $20 million. The companys CFO has estimated the following cash flows associated with the new plant:
Year 1 = $5.8 million
Year 2 = $7.9 million
Year 3 = $8.6 million
Year 4 = $10.5 million
The company is concerned about its current sales to another country, which are expected to be reduced by $1,200,000 for each of the four years as a result of setting up the plant. Given that the companys required rate of return is 12%, the NPV of the project is closest to:
$0.63 million. | |
$4.27 million. | |
$2.27 million. |
Sun Technologies is considering investing in two projects, A and B, that require an initial outlay of $4 million and $5.5 million, respectively. The company requires a rate of return of 24% on its investments. Cash flows associated with the two projects are as follows:
Years | 1 | 2 | 3 | 4 |
---|---|---|---|---|
Project A ($ millions) | 1.8 | 2.4 | 2.8 | 2.1 |
Project B ($ millions) | 1.5 | 1.8 | 2.4 | 3.2 |
Which of the following statements is most accurate?
The company should invest in:
Project A only, because Project Bs IRR is less than the required rate of return. | |
Project B only, because Project-As IRR is less than the required rate of return. | |
Both projects, because their IRRs are more than the required rate of return. |
Malcolm Technologies directors are considering the purchase of a subsidiary for $90 million. The present value of the future after-tax cash flows associated with the subsidiary is estimated to be $120 million. This is new information and is independent of other expectations regarding the company. The company has 3 million shares outstanding at the market price of $50. If the company goes ahead with the purchase, a market price of the companys stock will be closest to:
$60 | |
$55 | |
$40 |
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