2. Growth options Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Consider the case of Markung's Co.: Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $70,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is your answer to the nearest whole dollar.) . (Note: Round
2. Growth options Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Consider the case of Markung's Co.: Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $70,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is your answer to the nearest whole dollar.) . (Note: Round
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
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Transcribed Image Text:2. Growth options
Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value
of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options.
Consider the case of Markung's Co.:
Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual
cash flows for the project under good conditions will be $70,000 and $11,000 under bad conditions. The firm believes that there is a
60% chance of good conditions and a 40% chance of bad conditions.
If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is
your answer to the nearest whole dollar.)
. (Note: Round
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