Problem 11-14 Market prices

The Cambridge Opera Association has come up with a unique door prize for its December 2019 fund-raising ball: Twenty door prizes will be distributed, each one a ticket entitling the bearer to receive a cash award from the association on December 31, 2020. The cash award is to be determined by calculating the ratio of the level of the Standard and Poor's Composite Index of stock prices on December 31, 2020, to its level on June 30, 2020, and multiplying by $125. Thus, if the index turns out to be 1,000 on June 30, 2020, and 1,260 on December 31, 2020, the payoff will be 125 (1,260/1,000) = $157.50.

After the ball, a black market springs up in which the tickets are traded. Assume the risk-free interest rate is 9% per year. Also assume the Cambridge Opera Association will be solvent at year-end 2020 and will, in fact, pay off on the tickets. (Ignore any dividends paid on the index.)

a.What will the tickets sell for on January 1, 2020?(Do not round intermediate calculations. Round your answer to2 decimal places.)

Ticket price$

b.What will the tickets sell for on June 30, 2020?(Do not round intermediate calculations. Round your answer to the nearest whole number.)

Ticket price$

Problem 10-10 Scenario analysis

Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 15.8 billion. The cost of capital is 9%. The initial investment can be depreciated on a straight-line basis over the 10-year life of the project. Profits are taxed at a rate of 50%.

Consider the following project estimates:

Market size1.18 millionMarket share.1Unit price480,000Unit variable cost440,000Fixed cost2.08 billion

What is the NPV of the electric scooter project?(A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in billions rounded to 3 decimal places.)

Net present valuebillion

Problem 11-2 Equilibrium prices

Demand for concave utility meters is expanding rapidly, but the industry is highly competitive. A utility meter plant costs $58 million to set up, and it has an annual capacity of 696,000 meters. The production cost is $5 per meter, and this cost is not expected to change. The machines have an indefinite physical life and the cost of capital is 12%. What is the competitive price of a utility meter? Ignore taxes.

Competitive price

$5

$10

$15

Problem 10-9 Biased forecasts

Cash flows for projects F and G are given below.

Cash Flows ($)

ProjectC₀ C₁ C₂ C₃ C₄ C₅ Etc.

F10,200+7,200+6,200+5,200 0 0 ...

G10,200+2,040+2,040+2,040+2,040+2,040...

The cost of capital is assumed to be 12%. Assume the forecasted cash flows for projects of this type are typically overstated. That is, each $1 in forecasted cash flows for periods C1 and later should be reduced by 6 cents based on prior experience. But a lazy financial manager, unwilling to take the time to either argue with the project's sponsors or to adjust the cash flows, instructs the managers to use a discount rate of 18%.

a.What are the projects true NPVs?(Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPVProject F$Project G$

b.What are the NPVs at the 18% discount rate?(Do not round intermediate calculations. Round your answers to 2 decimal places.)

NPV

Project F$

Project G$

Problem 11-12 Economic rents

Consider the following information given below:

($ in millions except as noted)Year 0 Year 1 Year 2 Year 3 Year 4 Year 5-10

Investment 100

Required rate of return 10%

Production (millions of pounds per year)00 46 92 92 92

Spread ($ per pound) 1.26 1.26 1.26 1.26 1.16 1.01

Production costs 0 0 36 36 36 36

Transport 0 0 10 8 8 8

Other costs 0 26 26 26 26 26

Production and transport costs are variable costs while other costs are fixed.

a-1.Calculate the NPV of the proposed polyzone project, if the spread in year 4 holds at $1.26 per pound.(Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Round your answer to 1 decimal place.)

Net present value$

a-2.Whats the right management decision?

The project is acceptable.The project is not acceptable.

b-1.Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 46 million pounds in year 1 rather than year 2.(Do not round intermediate calculations. Round your answer to 1 decimal place.)

Net present value$

b-2.Whats the right management decision?

The project is acceptable.The project is not acceptable.

c-1.Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $31 million. Competitors production costs do not change.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Net present value$

c-2.Whats the right management decision?

The project is acceptable.

The project is not acceptable.