This document contains instructions and information for multiple assignments related to finance topics including risk assessment, capital budgeting, breakeven analysis, impact of inflation, real options, and capital rationing. It provides details on 5 different practice problems (P12-1, P12-3, P12-6, P12-17, P12-19) involving calculation of NPV, risk assessment, consideration of inflation and real options. The document directs the user to evaluate risks and complete capital budgeting analyses for various investment projects under different conditions.

1. UOP FIN 486 Week 4 Individual Assignment (P12-1, P12-3, P12-
6, P12-17, P12-19) NEW
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P12–1
Recognizing risk Caradine Corp., a media services firm with net
earnings of $3,200,000 in the last year, is considering the
following projects.
LG 1
The media services business is cyclical and highly competitive.
The board of directors has asked you, as chief financial officer,
to do the following:
a.Evaluate the risk of each proposed project and rank it “low,”
“medium,” or “high.”
b.Comment on why you chose each ranking.
P12–3
Breakeven cash inflows and risk Blair Gasses and Chemicals is
a supplier of highly purified gases to semiconductor
manufacturers. A large chip producer has asked Blair to build a
new gas production facility close to an existing semiconductor
plant. Once the new gas plant is in place, Blair will be the
exclusive supplier for that semiconductor fabrication plant for
the subsequent 5 years. Blair is considering one of two plant
designs. The first is Blair’s “standard” plant, which will cost $30
million to build. The second is for a “custom” plant, which will
cost $40 million to build. The custom plant will allow Blair to
produce the highly specialized gases that are required for an

2. emerging semiconductor manufacturing process. Blair
estimates that its client will order $10 million of product per
year if the traditional plant is constructed, but if the customized
design is put in place, Blair expects to sell $15 million worth of
product annually to its client. Blair has enough money to build
either type of plant, and, in the absence of risk differences,
accepts the project with the highest NPV. The cost of capital is
12%.
LG 2
a.Find the NPV for each project. Are the projects acceptable?
b.Find the breakeven cash inflow for each project.
c.The firm has estimated the probabilities of achieving various
ranges of cash inflows for the two projects as shown in the
following table. What is the probability that each project will
achieve at least the breakeven cash inflow found in part b?
d.Which project is more risky? Which project has the
potentially higher NPV? Discuss the risk–return trade-offs of
the two projects.
e.If the firm wished to minimize losses (that is, NPV < $0),
which project would you recommend? Which would you
recommend if the goal were to achieve a higher NPV?
P12–6
Impact of inflation on investments You are interested in an
investment project that costs $40,000 initially. The investment
has a 5-year horizon and promises future end-of-year cash
inflows of $12,000, $12,500, $11,500, $9,000, and $8,500,
respectively. Your current opportunity cost is 6.5% per year.
However, the Fed has stated that inflation may rise by 1.5% or
may fall by the same amount over the next 5 years.
LG 2
Assume a direct positive impact of inflation on the prevailing
rates (Fisher effect) and answer the following questions.
(Assume that inflation has an impact on the opportunity cost,

3. but that the cash flows are contractually fixed and are not
affected by inflation).
a.What is the net present value (NPV) of the investment under
the current required rate of return?
b.What is the net present value (NPV) of the investment under a
period of rising inflation?
c.What is the net present value (NPV) of the investment under a
period of falling inflation?
d.From your answers in a, b, and c, what relationship do you see
emerge between changes in inflation and asset valuation?
P12–17
Real options and the strategic NPV Jenny Rene, the CFO of Asor
Products, Inc., has just completed an evaluation of a proposed
capital expenditure for equipment that would expand the firm’s
manufacturing capacity. Using the traditional NPV
methodology, she found the project unacceptable because
LG 6
NPVtraditional = −$1,700 < $0
Before recommending rejection of the proposed project, she
has decided to assess whether there might be real options
embedded in the firm’s cash flows. Her evaluation uncovered
three options:
Option 1: Abandonment. The project could be abandoned at the
end of 3 years, resulting in an addition to NPV of $1,200.
Option 2: Growth. If the projected outcomes occurred, an
opportunity to expand the firm’s product offerings further
would become available at the end of 4 years. Exercise of this
option is estimated to add $3,000 to the project’s NPV.
Option 3: Timing. Certain phases of the proposed project could
be delayed if market and competitive conditions caused the
firm’s forecast revenues to develop more slowly than planned.
Such a delay in implementation at that point has an NPV of
$10,000.

4. Jenny estimated that there was a 25% chance that the
abandonment option would need to be exercised, a 30% chance
that the growth option would be exercised, and only a 10%
chance that the implementation of certain phases of the project
would affect timing.
a.Use the information provided to calculate the strategic NPV,
NPVstrategic, for Asor Products’ proposed equipment
expenditure.
b.Judging on the basis of your findings in part a, what action
should Jenny recommend to management with regard to the
proposed equipment expenditure?
c.In general, how does this problem demonstrate the
importance of considering real options when making capital
budgeting decisions?
P12–19
Capital rationing: NPV approach A firm with a 13% cost of
capital must select the optimal group of projects from those
shown in the following table, given its capital budget of $1
million.
LG 6
a.Calculate the present value of cash inflows associated with
each project.
b.Select the optimal group of projects, keeping in mind that
unused funds are costly.