1. You are a financial analyst at HE PLC and are evaluating a set of risky investment...

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Finance

1.
You are a financial analyst at HE PLC and are evaluating a setof risky investment project, some features of which are notedbelow:
Project ID
Investment Outlay
Present Value of Future Cash Flows
A
1400
1875
B
2250
2800
C
2100
1800
D
3250
4425
E
4200
5500
The investment outlay and presentvalue of the future cash flows are in millions. There is a limitedbudget of £6,250 million, such that all the projects cannot bechosen for investment and if need be, you can invest in fractionsof a project. With supporting calculations, make yourrecommendation on the portfolio of projects that maximises the netpresent value for the company.
You own a small manufacturing operation that currentlygenerates revenues of £2 million per year. Next year, based upon apending decision by the government whether to award you a long-termgovernment contract, your revenues will either increase by 30% ordecrease by 25%, with equal probability, and stay at that level aslong as you continue operations. Running costs are £1.6 million peryear. Your cost of capital is 10% per annum.
If you can sell the plant at any timeto a large conglomerate for £5 million. What is the value of yourcompany today?
Discuss the role of real options in the valuation of acompany.

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3.9 Ratings (644 Votes)

a Project ID Intial Payoff PV of cashflow NPVInvestment Rank on investment Preferences Capital Investment A 1400 1875 339 2 1400 B 2250 2800 244 4 0 C 2100 1800 143 5 0 D 3250 4425 362 1 See Answer

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1.You are a financial analyst at HE PLC and are evaluating a setof risky investment project, some features of which are notedbelow:Project IDInvestment OutlayPresent Value of Future Cash FlowsA14001875B22502800C21001800D32504425E42005500The investment outlay and presentvalue of the future cash flows are in millions. There is a limitedbudget of £6,250 million, such that all the projects cannot bechosen for investment and if need be, you can invest in fractionsof a project. With supporting calculations, make yourrecommendation on the portfolio of projects that maximises the netpresent value for the company.You own a small manufacturing operation that currentlygenerates revenues of £2 million per year. Next year, based upon apending decision by the government whether to award you a long-termgovernment contract, your revenues will either increase by 30% ordecrease by 25%, with equal probability, and stay at that level aslong as you continue operations. Running costs are £1.6 million peryear. Your cost of capital is 10% per annum.If you can sell the plant at any timeto a large conglomerate for £5 million. What is the value of yourcompany today?Discuss the role of real options in the valuation of acompany.

Project ID	Investment Outlay	Present Value of Future Cash Flows
A	1400	1875
B	2250	2800
C	2100	1800
D	3250	4425
E	4200	5500