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Landberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's expected NPV if it can be abandoned?

Landberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's expected NPV if it can be abandoned?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Landberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's expected NPV if it can be abandoned?
Transcribed Image Text:Landberg Inc. is considering a project which would require a $1.85 million after-tax investment today (t = 0). The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax. There is a 45% probability that the tax will pass. If the tax passes, the factory will produce after-tax cash flows of $40,000 at the end of each of the next 5 years. There is a 55% probability that the tax will not pass. If the tax does not pass, the factory will produce after-tax cash flows of $800,000 for the next 5 years. The project has a WACC of 10%. If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes. If the factory project is abandoned, the firm will receive the expected $40,000 cash flow at t = 1, and the property will be sold netting $900,000 (after taxes are considered) at t = 1. Once the project is abandoned, the company would no longer receive any cash inflows from it. What is the project's expected NPV if it can be abandoned?
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