Penske has come up with a new gadget prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $560,000. The management team believes that there is a 40% chance that the test marketing will be successful (which also means 60% chance of test marketing failure) and that there will be sufficient demand for the new gadget. If the test-marketing phase is successful, then Penske will invest $3.1 million in year one to build a plant that will generate expected annual after-tax cash flows of $600,000 in perpetuity beginning in year two. If the test marketing is not successful, Penske can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $220,000 in perpetuity beginning in year two. Penske's cost of capital is 20.00%. Assume that Penske has the ability to ignore the pilot production and test marketing and to go ahead and build its manufacturing plant immediately. Assuming that the probability of high demand is 40% and the probability of low demand is 60%, what is the NPV of the Penske' project if it goes ahead with building the plant immediately?
F2.
Penske has come up with a new gadget prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $560,000. The management team believes that there is a 40% chance that the test marketing will be successful (which also means 60% chance of test marketing failure) and that there will be sufficient demand for the new gadget. If the test-marketing phase is successful, then Penske will invest $3.1 million in year one to build a plant that will generate expected annual after-tax cash flows of $600,000 in perpetuity beginning in year two. If the test marketing is not successful, Penske can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $220,000 in perpetuity beginning in year two. Penske's cost of capital is 20.00%. Assume that Penske has the ability to ignore the pilot production and test marketing and to go ahead and build its manufacturing plant immediately. Assuming that the probability of high demand is 40% and the probability of low demand is 60%, what is the
-$1,313,224
-$1,240,000
-$1,166,776
-$1,386,448
-$1,459,672
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