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Question 7 (2 points) You are evaluating a product. The market demand for the product can be low or high. The product requires an investment
Question 7 (2 points) You are evaluating a product. The market demand for the product can be low or high. The product requires an investment of $500. If the market demand is high, the product will have a payoff of $800. If the market demand is low, the product will have payoff of $340. You do not know whether the market demand is high or low, but you know the probability that the market demand will be high is 75%, and that it will be low is 25%. Given the above information, you calculate the NPV to be: (0.75*800 +0.25*340) - 500 Now, a market research organization offers to do a survey to determine whether the demand will be high or low BEFORE you make the 500 investment. What is the value of the survey to you? That is, the maximum amount you would be ready to pay to have the survey conducted? (Your answer should be positive) This is a Growing perpetuity formula. Remember the rate of discount and rate of return are one and the same thing. A firm has invested $110,000 in a project. The project will return cash of $2,000 at the end of the first year, and every year in the future with a growth rate of 5%. That is, it will return $2,100 at the end of the second year, $2,205 at the end of the third year and so on. What is the IRR for the project? Your Answer: Answer Question 5 (2 points) A firm is evaluating a product. The market demand for the product can be low or high The product requires an investment of $1,010. If the market demand is low, then there is a 70% chance that the product will sell for $800 and a 30% chance it will sell for $1,200. What is the NPV of the project if the market demand is low? 7:18 PM Question 7 (2 points) You are evaluating a product. The market demand for the product can be low or high. The product requires an investment of $500. If the market demand is high, the product will have a payoff of $800. If the market demand is low, the product will have payoff of $340. You do not know whether the market demand is high or low, but you know the probability that the market demand will be high is 75%, and that it will be low is 25%. Given the above information, you calculate the NPV to be: (0.75*800 +0.25*340) - 500 Now, a market research organization offers to do a survey to determine whether the demand will be high or low BEFORE you make the 500 investment. What is the value of the survey to you? That is, the maximum amount you would be ready to pay to have the survey conducted? (Your answer should be positive) This is a Growing perpetuity formula. Remember the rate of discount and rate of return are one and the same thing. A firm has invested $110,000 in a project. The project will return cash of $2,000 at the end of the first year, and every year in the future with a growth rate of 5%. That is, it will return $2,100 at the end of the second year, $2,205 at the end of the third year and so on. What is the IRR for the project? Your Answer: Answer Question 5 (2 points) A firm is evaluating a product. The market demand for the product can be low or high The product requires an investment of $1,010. If the market demand is low, then there is a 70% chance that the product will sell for $800 and a 30% chance it will sell for $1,200. What is the NPV of the project if the market demand is low? 7:18 PM
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