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(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.

Time                       0    1     2       3

Start now            -10    12   18     0

Start next year        0    -8   13    17

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



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:

Year                                           0     1       2          3        4         5     Thereafter

Revenues                                  0  2000  3000  4000  4000   2400         0

Expenses                                  0    750     900  1500 1500      900        0

NTT-Docomo believes that each year a working capital level equal to 10% of the following year’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 we’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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