All American Telephones Inc. is considering the production of a new cell phone. The project will require an after-tax investment of $13 million. If the phone is well received, the project will produce after-tax cash flows of $9 million a year for 3 years, but if the market does not like the product, the after-tax cash flows will be only $1 million per year. There is a 50% probability of both good and bad market conditions. All American can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the project's after-tax investment or its after-tax cash flows-only their timing. Because of the anticipated shifts in technology, the 1-year delay means that after-tax cash flows will continue only 2 years after the initial investment is made. All American's WACC is 13%. What action do you recommend? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to three decimal places. NPV without waiting: $ NPV of waiting 1 year: $ The best choice is ✔ -Select- not to wait. to wait for one year. million million

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
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All American Telephones Inc. is considering the production of a new cell phone. The project will require an after-tax investment of $13 million. If the phone is well received, the
project will produce after-tax cash flows of $9 million a year for 3 years, but if the market does not like the product, the after-tax cash flows will be only $1 million per year. There is
a 50% probability of both good and bad market conditions. All American can delay the project a year while it conducts a test to determine whether demand will be strong or weak.
The delay will not affect the dollar amounts involved for the project's after-tax investment or its after-tax cash flows-only their timing. Because of the anticipated shifts in
technology, the 1-year delay means that after-tax cash flows will continue only 2 years after the initial investment is made. All American's WACC is 13%. What action do you
recommend? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do
not round intermediate calculations. Round your answers to three decimal places.
NPV without waiting: $
NPV of waiting 1 year: $
The best choice is ✔ -Select-
not to wait.
to wait for one year.
million
million
Transcribed Image Text:All American Telephones Inc. is considering the production of a new cell phone. The project will require an after-tax investment of $13 million. If the phone is well received, the project will produce after-tax cash flows of $9 million a year for 3 years, but if the market does not like the product, the after-tax cash flows will be only $1 million per year. There is a 50% probability of both good and bad market conditions. All American can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved for the project's after-tax investment or its after-tax cash flows-only their timing. Because of the anticipated shifts in technology, the 1-year delay means that after-tax cash flows will continue only 2 years after the initial investment is made. All American's WACC is 13%. What action do you recommend? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to three decimal places. NPV without waiting: $ NPV of waiting 1 year: $ The best choice is ✔ -Select- not to wait. to wait for one year. million million
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