Question
Please answer all 3 parts to the question, and round to 2 decimal parts when needed for a thumbs up! Thanks so much 1.a) You
Please answer all 3 parts to the question, and round to 2 decimal parts when needed for a thumbs up! Thanks so much
1.a) You are considering producing a new product, which if it is successful will produce cash flows of $35,000 per year in perpetuity. If it is unsuccessful, the cash flow will be -$21,000 in the first year and then you will shut down. If the probability of success is 0.45 and the opportunity cost of capital is 13 percent, what is the maximum that you would be willing to pay to undertake the investment?
b) Given that the maximum you would be willing to pay (found above), should the decision be to market or not if the cost of the investment is 100,000?
c) Suppose a firm's profits increase 105 percent after sales change from $3.3 million to $4 million. What is the firm's degree of operating leverage (DOL)? Round your answer to two decimal places.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started