Johnny Wellington, an entrepreneur who wants to engage in a short term business project, comes to you for advice. As an expert in capital budgeting, Johnny wants you to study the feasibility of the project. In particular, he needs your help to forecast the upcoming cash flows the project is going to require and generate throughout its life. After a few meetings with Johnny and his business partners, you suggest that a pilot run be conducted.
Upon completion of the pilot run at the end of year 1, Johnny and his associates can choose either to continue with the project or terminate it. You forecast that this project will generate cash flows for 4 years after the pilot run if Johnny decides to further proceed.
The pilot run costs $1.0 million to start and if they decide to continue with the project after this pilot run, an additional investment cost amounting to USD1.6 million will be incurred at the end of year 1. The investment cost of USD1.6 million will be fully depreciated on a straight line basis over the life of the project with no scrap value at the end. If the outcome from the pilot run is positive, Johnny can launch the project in full scale at the end of year 1. Revenues, variable costs and fixed costs for years 2 through 5 are estimated to be as follows:
|Revenues||USD 7 mil / year|
|Variable Costs||USD 3 mil / year|
|Fixed Costs||USD1.8 mil / year|
However, if the outcome from the pilot run is not encouraging and the team decides to launch the project in full scale, the following estimates are obtained:
|Revenues||USD 4.05 mil / year|
|Variable Costs||USD 1.735 mil / year|
|Fixed Costs||USD 1.8 mil / year|
You project that the pilot run has a 60% chance of being successful (i.e. outcome is positive).
To finance the pilot run and the full-scale project, Johnny and his associates decide to use 50% debt and 50% equity. An investor who is Johnny’s high school buddy, Barry Lawson, agrees toenter into a special arrangement in which 5-year promissory notes with a face value of USD1000 per note will be sold to Barry at a price of USD694.11 per note. These notes do not make intermediate interest payments. (Note: Consider annual compounding for the promissory notes.)
You gather some market data to work out the equity beta for the project and it is determined to
be 1.50. Further, the market return and T-bill rate are 11 % and 4%, respectively. Assume the
T-bill rate is an appropriate proxy for the risk-free rate of return. Profits and losses from the project will be taxed at a rate of 34%.
a) What is the present value of the cash flows at year 1 if the outcome from the pilot run is negative and the team decides to launch the project in full scale? use 10% as the appropriate discount rate. [Hint: Consider cash flows from year 1 onwards] (3 marks)
b) Should the project be implemented today (i.e. year 0)? Provide relevantly and supporting calculations. Again, use 10% as the appropriate discount rate. Show all steps and give proper explanations. (5 marks)Get Finance homework help today
Why Choose Us
At Myhomeworkwriters.com, we always aim at 100% customer satisfaction. As such, we never compromise o the quality of our homework services. Our homework helpers ensure that they craft each paper carefully to match the requirements of the instruction form.
Professional Academic Writers
With Myhomeworkwriters.com, every student is guaranteed high-quality, professionally written papers. We ensure that we hire individuals with high academic qualifications who can maintain our quality policy. These writers undergo further training to sharpen their writing skills, making them more competent in writing academic papers.
Our company maintains a fair pricing system for all academic writing services to ensure affordability. Our pricing system generates quotations based on the properties of individual papers.
My Homework Writers guarantees all students of swift delivery of papers. We understand that time is an essential factor in the academic world. Therefore, we ensure that we deliver the paper on or before the agreed date to give students ample time for reviewing.
Myhomeworkwriters.com maintains a zero-plagiarism policy in all papers. As such, My Homework Writers professional academic writers ensure that they use the students’ instructions to deliver plagiarism-free papers. We are very keen on avoiding any chance of similarities with previous papers.
Customer Support 24/7
Our customer support works around the clock to provide students with assistance or guidance at any time of the day. Students can always communicate with us through our live chat system or our email and receive instant responses. Feel free to contact us via the Chat window or support email: firstname.lastname@example.org.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our writers complete papers strictly according to your instructions and needs, no matter what university, college, or high school you study in.
Our Homework Writing Services
My Homework Writers holds a reputation for being a platform that provides high-quality homework writing services. All you need to do is provide us with all the necessary requirements of the paper and wait for quality results.
At My Homework Writers, we have highly qualified academic gurus who will offer great assistance towards completing your essays. Our homework writing service providers are well-versed with all the aspects of developing high-quality and relevant essays.
Admission and Business Papers
With Myhomeworkwriters.com, we will help you secure a position at your desired institution. Our essay writing services include the crafting of admissions papers. We will still help you climb your career ladder by helping you write the official papers that will help you secure a job. We will guide you on how to write an outstanding portfolio or resume.
Editing and Proofreading
Myhomeworkwriters.com has a professional editorial team that will help you organize your paper, paraphrase it, and eliminate any possible mistakes. Also, we will help you check on plagiarism to ensure that your final paper posses quality and originality.
My Homework Writers harbors professional academic writers from diverse academic disciplines. As such, we can develop homework writing services in all academic areas. The simplicity or complexity of the paper does not affect the quality of homework writing services.