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Blizzard [7]
3 years ago
7

You are the CFO of a major pharmaceutical firm. A division manager has presented senior management with an investment opportunit

y.
The project would require an investment of $95 million today

If the project succeeds, it will be worth $1 billion in a year. You estimate that there is only a 10% chance that the venture would succeed. If it fails, then in a year you will scrap the project and all of your firm’s $95 million investment will be lost.

Whether the venture succeeds or fails is independent of general market conditions.

The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes.

What is the NPV of the project?

$775 million

$870 million

$2.1 million

-$95 million
Business
2 answers:
DochEvi [55]3 years ago
4 0

Answer: $2.1 million

Explanation:

It is mentioned the project is independent of the outcome of general market  which means that

=> beta = 0

Using the CAPM formula which is,

r=rt + B* (rm -rf)

=> r = 3% + 0*(12%-3%) = 3%

Expected value of Project in one year = $1 billions * 0.1

Expected value of Project in one year = $100 millions

NPV = Expected value of Project in one year/ (1 + 0.03) - Initial cost

NPV = 100/ (1 + 0.03) - 95

NPV = 97.1 - 95

NPV = $2.1 million

Viefleur [7K]3 years ago
4 0

Answer:

$2.1 million

Explanation:

We solve for the expected monetary value at the end of the project:

\left[\begin{array}{cccc}State&Return&Probability&Weight\\success&1000&0.1&100\\fail&0&0.9&0\\Total&&1&100\\\end{array}\right]

Then, we have to know at which rate to discount this value so we use CAPM

Ke= r_f + \beta (r_m-r_f)

risk free = 0.03

market rate = 0.12

premium market = (market rate - risk free) 0.09

beta(non diversifiable risk) = 0 (independent from the market threfore no correlation.

Ke= 0.03 + 0 (0.09)

Ke 0.03000

Now we discount:

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity  $100.00

time  1.00

rate  0.03000

\frac{100}{(1 + 0.03)^{1} } = PV  

PV   97.0874

NPV: 97.0874 - 95 = 2.0874 we round up and get 2.10 presnet value (in millions)

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5 0
3 years ago
The sec filed civil false-certification charges against which u.s. financial institution
drek231 [11]
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A) Wells Fargo
B) Countrywide
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3 years ago
Fusaro Corporation uses a predetermined overhead rate base on machine-hours that it recalculates at the beginning of each year.
WARRIOR [948]

Answer:

The amount of manufacturing overhead that would have been applied to all jobs during the period is $1,289,340.00

Explanation:

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4 0
3 years ago
The statement of purpose for an analytical report is often more comprehensive than for an informational report.
pshichka [43]

Answer:

a. True

Explanation:

An informational report is a type of report in business that simply provides facts and data about a particular situation without supporting these details with an in-depth analysis and recommendation for improvement. An analytical report however has three of these characteristics. It provides facts and data, analyzes them, and makes the needed recommendation. The statement of purpose in an informational report is simple when compared to the statement of purpose in an analytical report which is more comprehensive. An infinitive phrase begins both reports.

For example, if in an organization, an employee named Adams John is told to prepare a report that evaluates the effect of new government regulations in the importation of parts needed for production, an informational statement of purpose would go thus:

To identify the effects of new governmental regulations on the importation of parts.

An analytical statement of purpose would go thus:

To identify the new governmental regulations limiting the importation of parts, analyze the effects of these regulations, and provide recommendations on better ways to adapt to the current situation.

The above shows a more detailed analytical statement of purpose.

6 0
3 years ago
The three most common cost behavior classifications are:___________A. variable costs, product costs, and sunk costs B. fixed cos
wel

Answer:

B. fixed costs, variable costs, and mixed costs

Explanation:

Mainly there are three types of cost i.e variable cost, fixed cost, and the mixed cost. The variable cost is that cost which is change when the production level change whereas the fixed cost is that cost which remains constant whether production level changes or not .  

The mixed cost is a semi-variable cost which include some part of the fixed cost and some part of the variable cost

So, the variable cost includes indirect material, indirect labor, and factory supplies

The fixed cost includes supervision, taxes, and depreciation expense.  

And, the mixed cost includes insurance, utilities, etc.

4 0
3 years ago
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