Question
Unknown problem no. 4 A firm is considering an investment of DKK 8 million at time t = 0 in a new production plant, to
Unknown problem no. 4 A firm is considering an investment of DKK 8 million at time t = 0 in a new production plant, to produce a new product with a market life of 5 years. The production plant is therefore disposed of after 5 years (year-end 5), where the scrap value of the plant is 0.9 million DKK (nominal prices). The nominal risk-free interest rate is 1% calculated annually. Based on an assessment of the investment risk, the owners require a nominal risk premium of 12% calculated annually. Ignore taxes. The incremental nominal cash flows of the investment (scrap value not included) of the investment are given in Table 4.1 below
Unknown problem no. 4 A firm is considering an investment of DKK 8 million at time t = 0 in a new production plant, to produce a new product with a market life of 5 years. The production plant is therefore disposed of after 5 years (year-end 5), where the scrap value of the plant is 0.9 million DKK (nominal prices). The nominal risk-free interest rate is 1% calculated annually. Based on an assessment of the investment risk, the owners require a nominal risk premium of 12% calculated annually. Ignore taxes. The incremental nominal cash flows of the investment (scrap value not included) of the investment are given in Table 4.1 below. Table 3.1: Incremental cash flows in nominal terms (in DKK million) Year Year 1 Year 2 Year 3 Year 4 Year 5 Incremental cash flow (year-end) 1.20 2.20 4.95 3.50 1.90 In which interval is given the Net Present Value (NPV) of the investment (in DKK million)? A. 26; 7] *B. 11, 2] C. 13;4] D. 15; 6] E. (-1; 1] F. ]7;8]Step by Step Solution
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