Bolton Fireworks, Inc. is considering researching and developing a new high-tech fireworks launcher to sell along side its collection of professional fireworks. If they go forward, a marketing analysis will be implemented immediately at a cost of $50,000 and take a year to complete. If its results are positive (80% probability) then Bolton will spend $100,000 to build a prototype launcher. If the marketing results are poor (20% probability), then it will abandon the project. It will take a year to build and evaluate the prototype launcher. If the prototype works as hoped (75% probability) then they will spend $500,000 on purchasing and installing manufacturing equipment. If the prototype doesn't work well (25% probability) then, of course, the prototype is trash and they will discard it and abandon the project. Once the manufacturing equipment is installed (it will take a year), then cash flows will either be $300,000 per year for 5 years (60% probability) or $50,000 per year for 5 years (40% probability). Note: these cash flows will start in Year 3 and last through Year 7. Calculate the project's expected NPV. Bolton's cost of capital is 10%. $3,970 $4,367 $4,804 $5,285 - CORRECT ANSWER $5,813
Bolton Fireworks, Inc. is considering researching and developing a new high-tech fireworks launcher to sell along side its collection of professional fireworks. If they go forward, a marketing analysis will be implemented immediately at a cost of $50,000 and take a year to complete. If its results are positive (80% probability) then Bolton will spend $100,000 to build a prototype launcher. If the marketing results are poor (20% probability), then it will abandon the project. It will take a year to build and evaluate the prototype launcher. If the prototype works as hoped (75% probability) then they will spend $500,000 on purchasing and installing manufacturing equipment. If the prototype doesn't work well (25% probability) then, of course, the prototype is trash and they will discard it and abandon the project. Once the manufacturing equipment is installed (it will take a year), then cash flows will either be $300,000 per year for 5 years (60% probability) or $50,000 per year for 5 years (40% probability). Note: these cash flows will start in Year 3 and last through Year 7. Calculate the project's expected NPV. Bolton's cost of capital is 10%.
- $3,970
- $4,367
- $4,804
- $5,285 - CORRECT ANSWER
- $5,813
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