Flexcell Bhd is considering investing in the production of a new technology, a handheldcommunication device, the target market is young undergraduates. The estimatedinvestment cost for this project is RM100 million with 3 year project life. Demand for theproduct, and therefore the project risk, is a function of the demand for Internet connections.The CFO working with marketing, currently estimates a 25% chance that such demand willbe high, a 50% probability that demand will be medium, and a 25% probability that demandwill be low. Associated after tax cash flows under each of these three market scenarios areestimated as follows: RM70 million, RMS0 million, and RM5 million. For projects of thisnature, a 15% discount rate (equal to the firm's weighted average cost of capital) isassumed.Because starting the project immediately on day 1 results in negative NPV of RM0.109million, management of the company has decided to avoid risk by delaying theimplementation of the project for 1 year, i.e. to wait and see. It will still spend RM100million investment cost, and expects to maintain customer demands of RM70 million andRM50 million if customer demands are high or medium respectively. However, ifcustomer demand turns out to be low after 1 year, then no investment will be made.At 15% discount rate, the present value (PV) factors are: Year 1 (0.870), Year 2 (0.756),Year 3 (0.658), Year 4 (0.572).Required:a. Using the above information, compute the Net Present Value (NPV) if the companydelayed the project for 1 year.b. Holding everything else constant, what is the expected NPV of the decision if theprobabilities for the three scenarios (after 1 year) are as follows: high (20%),medium (48%), and low (32%)?c. From your answers in (a) and (b) above, what conclusion can be derived, and why?

Cost of the project 100 Million Life of the project 3 years High- Demand…

a. Using the above information, compute the Net Present Value (NPV) if the company delayed the project for 1 year. b. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios (after 1 year) are as follows: high (20%), medium (48%), and low (32%)? c. From your answers in (a) and (b) above, what conclusion can be derived, and why?

a. Using the above information, compute the Net Present Value (NPV) if the company delayed the project for 1 year. b. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios (after 1 year) are as follows: high (20%), medium (48%), and low (32%)? c. From your answers in (a) and (b) above, what conclusion can be derived, and why?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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