Hopewell Enterprises is a globally diverse conglomerate with interests in divers
ID: 2657658 • Letter: H
Question
Hopewell Enterprises is a globally diverse conglomerate with interests in diverse retail, medical, and technology sectors. The firm has a beta of 1.4 and a cost of capital of 13.8 percent. Medical Associates is a specialty firm in the medical equipment field and has a beta of 1.6 and a cost of capital of 15.7 percent. With the aging of America, both firms recognize the opportunities that exist in the medical field and are considering expansion in this area. At present, there is an opportunity for multiple firms to be involved in a new medical devices project. The project will require an investment from each investor of $6.8 million. The project is expected to return $11.5 million to each investor in one lump sum payment at the end of year 4. Which firm or firms, if either, should accept this project? vedExplanation / Answer
NPV for Hopewell enterprises
cost of project - present value of cash inflow
-6.8+(11.5/(1.138)^4)
0.056915
NPV for medical Associate
cost of project - present value of cash inflow
-6.8+(11.5/(1.157)^4)
-0.38252
As NPV for Medical Associate is negative so Medical associate will not invest into project and it is positive for Hopewell enterprises so it will accept the project
NPV for Hopewell enterprises
cost of project - present value of cash inflow
-6.8+(11.5/(1.138)^4)
0.056915
NPV for medical Associate
cost of project - present value of cash inflow
-6.8+(11.5/(1.157)^4)
-0.38252
As NPV for Medical Associate is negative so Medical associate will not invest into project and it is positive for Hopewell enterprises so it will accept the project
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