Results from (b), (c), and (d) are the same because all methods value Xia's assets today.
Here is the full question
Risk-free Interest Rate = 9.50%
Project A:
NPV = -$16,000 + $27,000/1.095
NPV = $8,657.53
Project B:
NPV = -$8,000 + $23,000/1.095
NPV = $13,004.57
Project C:
NPV = -$61,000 + $79,000/1.095
NPV = $11,146.12
All projects have positive NPV, and Xia has enough cash, so Xia should take all of them.
Answer b.
Total Value of Assets = Cash + NPV of Projects
Total Value of Assets = $100,000 + $8,657.53 + $13,004.57 + $11,146.12
Total Value of Assets = $132,808.22
Answer c.
Cash in hand to day = $100,000
Cash invested in projects = $16,000 + $8,000 + $61,000
Cash invested in projects = $85,000
Cash invested for 1 year = $100,000 - $85,000
Cash invested for 1 year = $15,000
Cash flow in 1 year = $15,000*1.095 + $27,000 + $23,000 + $79,000
Cash flow in 1 year = $145,425
Cash flow in 1 year = $145,425
Value of Xia today = $145,425/1.095
Value of Xia today = $132,808.22
Answer d.
Unused Cash = $100,000 - $85,000
Unused Cash = $15,000
Cash flow today = $15,000
Cash flow in 1 year = $27,000 + $23,000 + $79,000
Cash flow in 1 year = $129,000
Value of Xia today = $15,000 + $129,000/1.095
Value of Xia today = $132,808.22
Answer e.
Results from (b), (c), and (d) are the same because all methods value Xia's assets today.
Complete Question: The Xia Corporation is a company whose sole assets are$ 100 comma 000in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows: (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
Project
Cash Flow Today
Cash Flow in One Year
A
negative $ 16 comma 000
$ 27 comma 000
B
negative $ 8 comma 000
$ 23 comma 000
C
negative $ 61 comma 000
$ 79 comma 000
Xia plans to invest any unused cash today at the risk-free interest rate of 9.5 %.In one year, all cash will be paid to investors and the company will be shut down.
a. What is the NPV of each project? Which projects should Xia undertake and how much cash should it retain?
b. What is the total value of Xia's assets (projects andcash) today?
c. What cash flows will the investors in Xia receive? Based on these cash flows, what is the value of Xia today?
d. Suppose Xia pays any unused cash to investors today, rather than investing it. What are the cash flows to investors in thiscase? Based on these cash flows, what is the value of Xiatoday?
e. Explain the relationship in your answers to parts (a,b,c & d)
a. What is the NPV of each project?
The NPV of Project A is _____ (Round to the nearest cent.)
The NPV of Project B is ______(Round to the nearest cent.)
The NPV of Project C is _____(Round to the nearestcent.)
Which projects should Xia undertake and how much cash should itretain? (Select all the correct choices.)
A. Projects B and C have positive NPV, and Xia has enoughcash, so Xia should take them.
B.All projects have positive NPV, and Xia has enough cash, so Xia should take all of them.
C.Projects A and B have positive NPV, and Xia has enough cash, so Xia should take them.
D.Projects A and C have positive NPV, and Xia has enough cash, so Xia should take them.
b. What is the total value of Xia's assets (projects andcash) today?
The total value of Xia's assets (projects and cash) today is$_____ (Round to the nearest cent.)
c. What cash flows will the investors in Xia receive?
The cash flows Xia will pay to investors in one year is $____(Round to the nearest cent.)
Based on these cash flows, what is the value of Xia today?
Based on these cash flows, the value of Xia today is $____(Round to the nearest cent.)
d. Suppose Xia pays any unused cash to investors today, rather than investing it. What are the cash flows to investors in thiscase?
The amount of cash investors will receive today is $____(Round to the nearest cent.)
The amount of cash investors will receive in one year is $ ____(Round to the nearest cent.)
Based on these cash flows, what is the value of Xia today?
The value of Xia today is $___ (Round to the nearestcent.)
e. Explain the relationship in your answers to parts (b),(c), and (d). (Select all the correct choices.)
A. Results from (b), (c), and (d) are the same because all methods value Xia's assets today.
B. Whether Xia pays out cash now or invests it at the risk-free rate, investors get the same value today.
C. The point is that a firm cannot increase its value by doing what investors can do by themselves (and is the essence of the separation principle).
D. The point is that a firm can increase its value by more efficiently doing what investors can do by themselves (and is the essence of the separation principle).
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