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    As A Separate Project Project P You Are Considering

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    Amit Pandey
    As a separate project (Project P), you are considering sponsoring a pavilion at an upcoming World's Fair. The pavilion would cost $800,000 to build and operate for 1 year, generating $5 million in cash flows. It would then cost $5 million to demolish the site and return it to its original condition. Project P has an estimated cost of capital of 10% and normal cash flows of -$0.8 million initially, $5 million in year 1, and -$5 million in year 2 for demolition.

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    As A Separate Project Project P You Are Considering

    Uploaded by

    Amit Pandey
    19 views2 pages
    As a separate project (Project P), you are considering sponsoring a pavilion at an upcoming World's Fair. The pavilion would cost $800,000 to build and operate for 1 year, generating $5 million in cash flows. It would then cost $5 million to demolish the site and return it to its original condition. Project P has an estimated cost of capital of 10% and normal cash flows of -$0.8 million initially, $5 million in year 1, and -$5 million in year 2 for demolition.

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    As a Separate Project Project p You Are Considering

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    As a separate project (Project P), you are considering sponsoring a pavilion at an upcoming World's Fair. The pavilion would cost $800,000 to build and operate for 1 year, generating $5 million in cash flows. It would then cost $5 million to demolish the site and return it to its original condition. Project P has an estimated cost of capital of 10% and normal cash flows of -$0.8 million initially, $5 million in year 1, and -$5 million in year 2 for demolition.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    19 views2 pages

    As A Separate Project Project P You Are Considering

    Uploaded by

    Amit Pandey
    As a separate project (Project P), you are considering sponsoring a pavilion at an upcoming World's Fair. The pavilion would cost $800,000 to build and operate for 1 year, generating $5 million in cash flows. It would then cost $5 million to demolish the site and return it to its original condition. Project P has an estimated cost of capital of 10% and normal cash flows of -$0.8 million initially, $5 million in year 1, and -$5 million in year 2 for demolition.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 2

    Solved: As a separate project Project P you are

    considering

    As a separate project (Project P), you are considering sponsoring a pavilion at the upcoming
    World’s Fair. The pavilion would cost $800,000, and it is expected to result in $5 million of
    incremental cash inflows during its 1 year of operation. However, it would then take another
    year, and $5 million of costs, to demolish the site and return it to its original condition. Thus,
    Project P’s expected net cash flows look like this (in millions of dollars):
    Year Net Cash Flows
    0......... ($0.8)
    1..........5.0
    2........... (5.0)
    The project is estimated to be of average risk, so its cost of capital is 10%.
    (1) What are normal and non-normal cash flows?
    (2) What is Project P’s NPV? What is its IRR? Its MIRR?
    (3) Draw Project P’s NPV profile. Does Project P have normal or non-normal cash flows?
    Should this project be accepted?
    You have just graduated from the MBA program of a large university, and one of your favorite
    courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you
    want to “be your own boss.” While you were in the master’s program, your grandfather died
    and left you $1 million to do with as you please. You are not an inventor, and you do not have a
    trade skill that you can market; however, you have decided that you would like to purchase at
    least one established franchise in the fast-foods area, maybe two (if profitable). The problem is
    that you have never been one to stay with any project for too long, so you figure that your time
    frame is 3 years.
    After 3 years, you will go on to something else.
    You have narrowed your selection down to two choices
    (1) Franchise L, Lisa’s Soups, Salads & Stuff, and
    (2) Franchise S, Sam’s Fabulous Fried Chicken. The net cash flows shown below include the
    price you would receive for selling the franchise in year 3 and the forecast of how each
    franchise will do over the 3-year period. Franchise L’s cash flows will start off slowly but will
    increase rather quickly as people become more health conscious, while Franchise S’s cash
    flows will start off high but will trail off as other chicken competitors enter the marketplace and
    as people become more health conscious and avoid fried foods. Franchise L serves breakfast
    and lunch, while Franchise S serves only dinner, so it is possible for you to invest in both
    franchises. You see these franchises as perfect complements to one another: You could attract
    both the lunch and dinner crowds and the heath-conscious and not-so-health-conscious crowds
    without the franchises directly competing against one another
    Here are the net cash flows (in thousands of dollars):

    Deprecation, salvage values, net working capital requirements, and tax effects are all included
    in these cash flows.
    You also have made subjective risk assessments of each franchise and concluded that both

    Reach out to [email protected] for enquiry.


    franchises have risk characteristics that require a return of 10%. You must now determine
    whether one or both of the franchises should beaccepted.

    As a separate project Project P you are considering

    ANSWER
    https://solvedquest.com/as-a-separate-project-project-p-you-are-considering/

    Reach out to [email protected] for enquiry.


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