1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
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)

You might be interested in
At the beginning of this month, the balance of clayton's checking account was $337.55. so far this month, he has received a payc
kupik [55]
The answer is $1034.52 hope i helped
5 0
3 years ago
Read 2 more answers
Colin presents his findings in class. His topic -- stories addressing effects of white flour on a person's health – features sci
Jet001 [13]

Answer:

Analogy is defined as a comparison between two things with an aim of clarification and explanation

- (D) A firm director describes the differences between documentary and fictional films to a group of people.

Definition means of a text, word,action or concept.

- (B) A professor asks his students to read the poem as if they are reading poetry for the very first time.

Visual Demonstration is an illustrative matter, for example a model, film or a slide designed to supplement spoken or written information in order to be understood easily.

- (A) The owner of a local coffee shop hangs up a map showing the countries the shop purchases it's coffee from.

4 0
3 years ago
A small wine and cheese store in Milwaukee sells dozens of different type of cheese: Bulgarian, French, Danish, Greek, and a dom
agasfer [191]

The domestic variety is cheaper because there is no import duties or no charges imposed on it because of the import from other countries.

<u>Explanation:</u>

A country produces a lot of goods and services in it's own economy using the resources which are present in it's own country. But the goods and the services that are not available in the country but are demanded by the citizens of the country are imported from other countries.

When these goods and services are imported from other countries then there is an imposition of duties or taxes on those goods making the charges of those goods high. With the transportation of the goods from one country to the other, then also some cost is imposed on the good. This increases the cost or the price of the good.

5 0
3 years ago
What are the primary functions of a central bank?
Vesnalui [34]

Answer:

The correct answer is:

  • Conduct monetary policy;
  • Ensure that the financial system is stable;
  • Provide banking services to commercial banks, depository institutions, and the federal government.

Explanation:

A central bank is the apex monetary authority in a country. It plays several crucial roles in the smooth working of the economy.

  1. A central bank issues currency on behalf of the government.
  2. It formulates monetary policy on behalf of the government.
  3. It acts as a banker for the government.
  4. It acts as a banker for commercial banks.
  5. It supervises all financial institutions.

The role of providing services to businesses and consumers is played by commercial banks. Fiscal policy is formulated by the government. The responsibility of ensuring the growth of the economy also falls with the government.

4 0
3 years ago
Which services are bannks most liikly to offer
gregori [183]

Answer:

checking accounts, saving accounts, certificates of deposit, and loans.

Explanation:

4 0
3 years ago
Other questions:
  • Gold Brands is the industry leader in golf equipment and not only has a degree of pricing power amongst its competition but also
    6·1 answer
  • In a fractional-reserve banking system, an increase in reserve requirements
    11·1 answer
  • You find a zero coupon bond with a par value of $10,000 and 13 years to maturity. If the yield to maturity on this bond is 4.7 p
    12·1 answer
  • is a structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value pot
    6·1 answer
  • Spaceley’s Sprockets has just developed a new product. George Jetson, the Head of Product Development, feels that the product is
    14·1 answer
  • Marika is a senior journalist at a news agency. She goes on a temporary leave for six months and travels around different parts
    15·1 answer
  • Which of the following is a way to buy stocks ?
    14·2 answers
  • $5000 is put into an empty savings account with a nominal interest rate of 5%. No other contributions are made to the account. w
    10·1 answer
  • Define financial literacy and financial planning in your own word
    6·1 answer
  • Trans-Atlantic Quotes. Separated by more than​ 3,000 nautical miles and five time​ zones, money and foreign exchange markets in
    9·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!