You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 64% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $9.5 million and yield profits of $1.06 million per year that grow at one of three possible growth rates in perpetuity: 2.9%, 0.0%, and -2.9%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12.1% per year. What is the present value of all future growth opportunities Big Industries will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.)

You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 64% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $9.5 million and yield profits of $1.06 million per year that grow at one of three possible growth rates in perpetuity: 2.9%, 0.0%, and -2.9%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12.1% per year. What is the present value of all future growth opportunities Big Industries will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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← You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 67% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $10.3 million and yield profits of $1.09 million per year that grow at one of three possible growth rates in perpetuity: 3.3%, 0.0%, and -3.3%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 11.6% per year. What is the present value of all future growth opportunities Big Industries…
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