Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

PLEASE SHOW IN EXCEL, AND ANSWER 1,2,and 3!!!!!!!!!!!!!!!!!!!!! A project requires an initial investment of $100,000 to purchase equipment. The equipment will be depreciated on

PLEASE SHOW IN EXCEL, AND ANSWER 1,2,and 3!!!!!!!!!!!!!!!!!!!!!

A project requires an initial investment of $100,000 to purchase equipment. The equipment will be depreciated on a straight-line basis over the five-year life of the project. The company expects the project to generate $50,000 of additional revenue per year and $15,000 of additional expenses per year. Management is also concerned about potential product liability losses. The companys risk manager developed the following annual loss distribution:

Loss Amount Probability

$0 70%

$5,000 20%

$10,000 8%

$50,000 2%

  1. Calculate the projects net present value assuming the company has a required return of 10% and faces a marginal tax rate of 40%.
  2. Should the company invest the $100,000 to buy the equipment? As part of your answer, explain the risk involved when using expected loss amounts in capital budgeting and how the cost of worry could be used to modify the calculation of net present value in part a.
  3. Calculate the breakeven cost of worry, that is, above this amount the project will not be accepted, and below this amount the project will be accepted.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Essentials Of Machine Learning In Finance And Accounting

Authors: Mohammad Zoynul Abedin, M. Kabir Hassan, Petr Hajek, Mohammed Mohi Uddin

1st Edition

0367480816, 978-0367480813

More Books

Students also viewed these Finance questions

Question

Give the best definition of Java and what it entails.

Answered: 1 week ago