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clatub le puon to produce 1Suppose the hair e lidt growth and eliminate baldness. ce the hair growth stimulant could be marketable within three years and yield ATs of $5 million per year forever. If the cost of capital for the research project is 15%, should the firm proceed with it? What is the minimum option value necessary to justify the research project? What is the minimum level of perpetual annual CFATs needed to justify the research project? Future investment option) Intel's development department would like to spend $35 mil- tion on final development and testing of a coprocessor. The DCF-NPV is -$12 million. Production cannot begin until testing has been completed, which will take several years, option to produce a valuable follow-on chip. and success is not assured. There is a 50% chance the research will also give the firmthe 2. Suppose the coprocessor could be marketable within two years and yield CFATs of $4 million per year forever. If the cost of capital for the research project is 10%, should the firmproceed with it? b. What is the minimum option value necessary to justify development? c. What is the minimum level of perpetual annual CFATs needed to justify development? Bll. (Replacement cycles) Auto Diagnostics Inc. is considering which of two emission testing devices to buy. Machine A costs $100,000, has a five-year useful life, and has operating expenses of $40,000 per year. Machine B costs $36,000, has a six-year useful life, and has operating expenses of $62,000 per year. Both machines will have zero salvage value, rev. ces of $85,000 per year, and straight-line depreciation to a zero book value, and both will be replaced at the end of their lives. The firm's tax rate is 35%. 2. Assume a 12% cost of capital for each machine. Which one should the firm buy? Suppose instead, machine A requires a higher cost of capital, 15%, because it's a riskier process. Machine B's cost of capital is still 1296. Which machine should the firm buy? eplacement cycles) Crandon Computer Repair Co. is considering which of two com- er diagnostics machines to buy. Machine A costs $60,000, has a five-year useful life, and "perating expenses of $15,000 per year. Machine B costs $30,000, has a six-year useful 112. Replaceme has operating life, and has opera value, revenues of both will be replace 2. Assume a 129 has operating expenses of $25.000 per year. Both machines will have zero salvage Fevenues of $75,000 per year, and straight-line depreciation to a zero book value, and be replaced at the end of their lives. The firm's tax rate is 35%. e a 12% cost of capital for each machine. Which one should the firm buy? Ppose instead that machine A requires a higher cost of capital, 15%, because it's a process. Machine B's cost of capital is still 12%. Which machine should the firm b. Suppose buy? 13. Escd: Incre Vincen que * Incrementalesh flow and NPV) A Wendy's franchisee is considering replacing his equipment. The equipment currently has a net book value of $60,000 and will con be depreciated on a straight-line basis to a netbook value of zero over the next three he franchisemates that the current equipment could be used for up to an additional The purchase price for the new equipment is $300,00, and it would be depreciated year Driedens lehrline basis to a netbook value of $50,000. The new Mnouce erating savings of $80,000 per year as compared to the replaced unue to be del The franchisee estimate for the new equip.co book value of years. The the per a six-year per would