9. You are a project analyst for a cable television firm that is considering upgrades to broadband service in four of its metro area cable systems. For the past three months you have been working on a team established to evaluate these investment alternatives. You have estimated upgrade costs for these projects and the added revenues you would expectthem to generate. The results of your analysis are summarized in the table below. You used a cost of capital of 9% in all net present value calculations. Construction costs are netted out of the NPV values. ProjectABCDInitial Investment2,500,0001,750,0003,000,000900,000NPV of Project @ 9%-100,0002,100,0002,400,000400,000Internal rate of Return5%21%18%13%(4)a.Consider the case where these projects are mutually exclusive. Your construction budget is large enough to finance any of these projects, and the cost of capital is 9%. Which, if any, of these projects would you recommend your firm select and why?(4)b.You need to be ready for questions about the cost of capital. Consider the case where these projects are notmutually exclusive, your firm's cost of capital rises to 12%, and there is no constraint on the amount it can invest. Which, if any,of these projects would you recommend your firm select and why?(4)c.Consider the case where these projects are notmutually exclusive and the initial investment budget (i.e., maximum total initial investment) is limited to $3,000,000. The cost of capital is 9%. Which, if any, of these projects would you recommend? Justify your recommendation. 7
10.Continuing your work with the cable television firm, top management has asked that you extend your analysis to consider the risks associated with the four projects. Using probabilistic forecasts for demand and cost, you have developed the following payoff matrix for the four investment projects. All returns are in net present value terms, with construction costs having been netted out.ProjectState of NatureABCDProbability1-600,0001,200,0001,600,000300,0000.252-400,0002,200,0002,300,000400,0000.253-200,0002,700,0002,100,000450,0000.254800,0003,700,0003,600,000450,0000.25Mean NPV-100,0002,400,000400,000(4)a.Calculate the mean NPV for Project B. If the projects are mutually exclusive, which is preferred under the expected value maximization criterion? Mean NPV for Project B:(Show your calculations)Preferred Project:(2)b.If the projects are mutually exclusive, which strategy would be preferred under the maximin criterion? Explain your reasoning.(6)c.Construct the regret matrix associated with this payoff matrix. Then identify the project that would be preferred under the minimax regret criterion. Project State of Nature A B C D 1 2 3 4 Preferred Project: 8
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