do2 - The present value of $15 million to be received in...

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Chapter 27, Question 2 a. The present value of $15 million to be received in four years at an interest rate of 11% is $15 million/(1.11)4 = $9.88 million. Because the present value of the payoff is less than the cost, the project should not be undertaken. The present value of $15 million to be received in four years at an interest rate of 10% is $15 million/(1.10)4 = $10.25 million. Because the present value of the payoff is greater than the cost, the project should be undertaken. The present value of $15 million to be received in four years at an interest rate of 9% is $15 million/(1.09)4 = $10.63 million. Because the present value of the payoff is greater than the cost, the project should be undertaken.
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Unformatted text preview: The present value of $15 million to be received in four years at an interest rate of 8% is $15 million/(1.08)4 = $11.03 million. Because the present value of the payoff is greater than the cost, the project should be undertaken. b. The exact cutoff for the interest rate between profitability and nonprofitability is the interest rate that will equate the present value of receiving $15 million in four years with the current cost of the project ($10 million): $10=$15 /(1+x )4 $10(1+x )4=$15 (1+x )4=1.5 (1+x )=(1.5)0.25 (1+x )=1.1067 x=0.1067 or 10.67% Therefore, an interest rate of 10.67% would be the cutoff between profitability and nonprofitability....
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