Use The Information Below To Answer Questions 1 Through

Use The Information Below To Answer Questions 1 Throu

Use the provided information to answer questions 1 through 4. There are two periods, t0 and t1. Michael has a wealth of $100 million and faces three investment opportunities. The first investment is building a shopping center costing $60 million at t0, paying off $72 million at t1. The second is building a parking garage costing $40 million at t0, paying off $55 million at t1. The third is building a club costing $5 million at t0, paying off $15 million at t1. The bank lends and borrows at 15% per period, with no valuation of future consumption or at t1. All answers should be in millions of dollars, rounded to two decimal places.

Questions include calculating the net present value (NPV) of the highest NPV project, the maximum consumption at t0, the maximum consumption when projects are mutually exclusive, and the maximum consumption given a new borrowing rate structure.

Paper For Above instruction

Michael’s investment decisions in the context of project valuations and consumption possibilities exemplify core principles of corporate finance. This analysis navigates through the valuation of projects using Net Present Value (NPV), explores the impact of mutually exclusive projects on consumption, and factors in changes in borrowing terms due to credit constraints. Each component underscores fundamental concepts essential for financial decision-making within the discipline.

Initially, understanding which project yields the highest NPV offers insights into optimal investment choices that maximize value for the investor. To compute the NPV of each project, we discount the future payoff at the given interest rate, which is 15%. For the shopping center, the NPV is (72 / (1 + 0.15)) - 60 = 62.61 - 60 = 2.61 million. For the parking garage, the NPV is (55 / 1.15) - 40 = 47.83 - 40 = 7.83 million. For the club, the NPV is (15 / 1.15) - 5 = 13.04 - 5 = 8.04 million. Therefore, the club project has the highest NPV at approximately $8.04 million.

Next, the maximum Michael can consume at t0 is equal to his initial wealth, minus any investments made, plus any proceeds from investments he chooses to undertake, considering the cleanest scenario of no investments or all in the highest NPV project. Since Michael’s wealth is $100 million, and the project with the highest NPV is the club at $8.04 million, investing in the club reduces his immediate consumption capacity. Without considering investment, his maximum consumption is $100 million. Investing in the club reduces available wealth to $100 million - $5 million + the future payoff discounted appropriately, but since he only cares about consumption at t0, his maximum consumption remains $100 million.

However, if the projects are mutually exclusive, Michael should select the project with the highest NPV to maximize his current consumption. Therefore, he would invest $5 million in the club and retain $100 million - $5 million = $95 million in consumption at t0. Importantly, mutual exclusivity prevents choosing multiple projects simultaneously. Consequently, the maximum consumption at t0 is $100 million if he abstains from investing, or $95 million if he invests in the most valuable project.

Finally, the scenario where the bank changes lending and borrowing terms—charging 20% for borrowing and allowing lending at only 10%—affects the feasible consumption. With asymmetric interest rates, borrowing becomes more expensive, and lending yields less return, constraining the maximum consumption. Since Michael only cares about current consumption and can lend or borrow, the most he can consume now depends on whether he borrows or lends, considering these rates. If he borrows, the cost in t1 dollars is higher ($1.20 per dollar borrowed), reducing the ability to finance consumption. Conversely, lending yields only 10%, providing limited benefit.

Calculating the most Michael can consume at t0 under these new conditions entails solving for the optimal borrowing or lending balance, considering that he cannot borrow at less than 20%. The maximum consumption is thus capped by his initial $100 million, minus any cost of borrowing or adjusted by the altered interest rates, roughly estimating to around $100 million given he chooses to lend or borrow cautiously and considering no investments are made in this scenario.

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