## (Solved) Question 1 (15 points) A firm has a choice of undertaking a project now or next year. The cash flows in the two cases are as follows.

Question 1 (15 points)

A firm has a choice of undertaking a project now or next year. The cash flows in the two cases are as follows.

TimeÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â 0Â Â Â  1Â Â Â Â  2Â Â  Â Â Â  3

Start nowÂ Â Â Â Â Â Â Â Â Â Â  -10Â Â Â  12Â Â  18Â Â Â Â  0

Start next yearÂ Â Â Â Â Â Â  0Â Â  Â -8Â Â Â 13Â Â Â  17

When should the firm undertake the project if the discount rate is 5 percent?

ï»¿Question 2 (15 points)

NTT-Docomo is preparing to launch its teleconferencing cell phone business. A \$6000 initial investment is required for this five-year project. The equipment will be depreciated with a straight-line depreciation over the five years to a final value of zero. NTT-Docomo expects to sell the equipment for a value of \$500 at the end of the five years. The revenue and expense estimates for the project are given as follows:

YearÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  0Â Â Â Â  1Â Â Â Â Â Â  2Â Â Â Â Â Â Â Â Â  3Â Â Â Â Â Â Â  4Â Â Â Â Â Â Â Â  5Â Â Â Â  Thereafter

RevenuesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  0Â  2000Â  3000Â  4000Â  4000Â Â  2400Â Â Â Â Â Â Â Â  0

ExpensesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  0Â Â Â  750Â Â Â Â  900Â  1500 1500Â Â Â Â Â  900Â Â Â Â Â Â Â Â 0

NTT-Docomo believes that each year a working capital level equal to 10% of the following yearâ€™s expected revenues should be maintained. The project will come to an end at the end of five years when the technology becomes obsolete. NTT-Docomo is in a 35% tax bracket and has a 12% required return on this project. Should NTT-Docomo enter this business?

Question 4 (15 points)

Remember the class discussion on the impact of revenue growth on firm value. Is revenue growth always good? Frame your discussion using revenue growth, return on invested capital (ROIC) and cost of capital in a comperative analysis.

Question 5 (20 points)

Please briefly summarize the discussion weâ€™ve had in class on the Lockheed case. First, lay out the setup and then explain what may have contibuted to the economically unsound decision made by the Lockeed management.

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