ABC Company is conducting a project with an up-front cost at t = 0 of $1,100,000. The project's subsequent cash flows depends on whether a competitor's product is approved by FDA. There is a 60% chance that the competitive product will be rejected, in which case the company's expected cash flows will be $509,512 at the end of each of the next four years (t = 1 to 4). There is a 40% chance that the competitor's product will be approved, in which case the expected cash flows will be only $153,401 in t = 1 to 4. The company will know for sure one year from today whether the competitor's product has been approved. If the company waits a year, the project's up-front cost at t = 1 will remain at $1,100,000. The subsequent cash flows will also remain the same with the same probabilities as no waiting, but will be received only for three years (t = 2 to 4). All cash flows are discounted at the company's WACC of 10%. What will the NPV at t=0 for each of the two strategies be? Round your answer to the nearest dollar, e.g., xxx,xxx. (Hint: Refer to the Evaluation of Investment Timing Option example in Real Options.) NPV at t=0 if the company proceeds today = $ NPV at t=0 if the company waits a year = $
ABC Company is conducting a project with an up-front cost at t = 0 of $1,100,000. The project's subsequent cash flows depends on whether a competitor's product is approved by FDA. There is a 60% chance that the competitive product will be rejected, in which case the company's expected cash flows will be $509,512 at the end of each of the next four years (t = 1 to 4). There is a 40% chance that the competitor's product will be approved, in which case the expected cash flows will be only $153,401 in t = 1 to 4. The company will know for sure one year from today whether the competitor's product has been approved. If the company waits a year, the project's up-front cost at t = 1 will remain at $1,100,000. The subsequent cash flows will also remain the same with the same probabilities as no waiting, but will be received only for three years (t = 2 to 4). All cash flows are discounted at the company's WACC of 10%. What will the NPV at t=0 for each of the two strategies be? Round your answer to the nearest dollar, e.g., xxx,xxx. (Hint: Refer to the Evaluation of Investment Timing Option example in Real Options.) NPV at t=0 if the company proceeds today = $ NPV at t=0 if the company waits a year = $
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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Transcribed Image Text:ABC Company is conducting a project with an up-front cost at t = 0 of $1,100,000. The project's
subsequent cash flows depends on whether a competitor's product is approved by FDA. There is a
60% chance that the competitive product will be rejected, in which case the company's expected
cash flows will be $509,512 at the end of each of the next four years (t = 1 to 4). There is a 40%
chance that the competitor's product will be approved, in which case the expected cash flows will be
only $153,401 in t = 1 to 4. The company will know for sure one year from today whether the
competitor's product has been approved.
If the company waits a year, the project's up-front cost at t = 1 will remain at $1,100,000. The
subsequent cash flows will also remain the same with the same probabilities as no waiting, but will
be received only for three years (t = 2 to 4). All cash flows are discounted at the company's WACC
of 10%.
What will the NPV at t=0 for each of the two strategies be? Round your answer to the nearest
dollar, e.g., xxx,xxx. (Hint: Refer to the Evaluation of Investment Timing Option example in Real
Options.)
NPV at t=0 if the company proceeds today = $
NPV at t=0 if the company waits a year = $
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