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Questions:

NOTE: Please, write step-by-step explanation in answers along with formulas in WORD Format ONLY. DO NOT USE EXCEL SHEET.

Q1)

A textile manufacturing company is considering an immediate replacement of its current machine with a new one. Either way, the production will be abandoned in 4 years. Replacing the machine has no impact on revenues, but the variable cost would decrease from $50 per unit to $40 per unit if the machine is replaced. The old machine could be sold for $10,000 today, and would have no salvage value in 4 years. The new machine's purchase price is $80,000, and if purchased will be sold for $30,000 in 4 years. Assuming 7% cost of capital, what is the minimum number of units that have to be produced annually in order to justify buying the new machine and selling the old one?

Q2)

Lakeland Landscaping, Inc. is considering buying a new lawnmower. The lawnmower can be purchased for $15.000, and is expected to last 8 years. The table below provides estimates for the expected annual revenues, annual expenses, and the market value of the lawnmower in 8 years, as well as estimates for optimistic and pessimistic scenarios. Calculate the PW of the project under each scenario. If the company's policy is that a project can only be accepted if it passes under all three scenarios, should the project be accepted? Assume 9% cost of capital

Project Estimate Scenarios

Optimistic Expected Pessimistic Annual Revenue 34,000 30,000 26,000 Annual Expense 16,000 20,000 24.000 Salvage Value 7.000 5.000 3.000

Q3)

The estimated annual cash flows of an investment project along with associated probabilities are given below. Determine the expected present worth of this annual cash flow series at an interest rate of 18% per year.

Year

P=0.7 -$125,000 $100,000 $110,000 $90.000

P=02 -$150,000 $75,000 $85.000 $65.000

P=0.1 -$100000 $125.000 $135.000 $115.000

Q4) Antropov Enterprises has an opportunity to enter a new market. This new market would last 2 years, but could be abandoned after year 1. Also, there is an option to expand the project in year 2. Entering the new market would require $2,500,000 initial investment.

With a 40% probability the move will be a failure and will generate net revenues of $1,000,000 in year 1, and -$1,000,000 (a loss) in year 2, unless the company decides to abandon the project at the end of year 1. which would result in contract penalty fees of $500,000 at the end of year 1 and no cash flows in year 2 With a 60% probability the move will be successful and generate net revenues of $3.000.000 in year 1. Without expanding the project, the net revenues in year 2 will be $4,000,000. Alternatively, if a decision is made and the project is expanded at the end of year 1, at a cost of $2,000,000, the net revenues in year 2 will instead be $6,500,000

Antropov uses 15% cost of capital for this type of project. Using the decision tree technique, compute the expected PW of the entire project, determine whether it should be accepted, and explain why