NUBD Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process X has a cost of P8,000 and will produce net cash flows of P5,000 per year for 2 years. Process Y will cost P11,500 and will produce cash flows of P4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if NUBD's cost of capital is 10 percent, by what amount will the better project increase NUBD's value? *
NUBD Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process X has a cost of P8,000 and will produce net cash flows of P5,000 per year for 2 years. Process Y will cost P11,500 and will produce cash flows of P4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if NUBD's cost of capital is 10 percent, by what amount will the better project increase NUBD's value? *
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Question
![NUBD Inc. is considering two average-risk
alternative ways of producing its patented
polo shirts. Process X has a cost of P8,000
and will produce net cash flows of P5,000 per
year for 2 years. Process Y will cost P11,500
and will produce cash flows of P4,000 per
year for 4 years. The company has a contract
that requires it to produce the shirts for 4
years, but the patent will expire after 4 years,
so the shirts will not be produced after 4
years. Inflation is expected to be zero during
the next 4 years. If cash inflows occur at the
end of each year, and if NUBD's cost of capital
is 10 percent, by what amount will the better
project increase NUBD's value? *](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7a5c3c85-327d-441f-b94a-a40a894cc353%2Fdcdae7e1-6bf9-4938-8caf-3385b5028a40%2F4z8b4l_processed.jpeg&w=3840&q=75)
Transcribed Image Text:NUBD Inc. is considering two average-risk
alternative ways of producing its patented
polo shirts. Process X has a cost of P8,000
and will produce net cash flows of P5,000 per
year for 2 years. Process Y will cost P11,500
and will produce cash flows of P4,000 per
year for 4 years. The company has a contract
that requires it to produce the shirts for 4
years, but the patent will expire after 4 years,
so the shirts will not be produced after 4
years. Inflation is expected to be zero during
the next 4 years. If cash inflows occur at the
end of each year, and if NUBD's cost of capital
is 10 percent, by what amount will the better
project increase NUBD's value? *
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