Project Falcon has an upfront after-tax cost of $100,000. The project is expected to produceafter-tax cash flows of $35,000 at the end of each of the next four years. The project has aWACC of 11%.However, if the company waits a year, they will find out more information about marketcondition and its effect on the project’s expected after-tax cash flows. If they wait a year,• There’s a 60% chance that the market will be strong and the expected after-tax CFs willbe $45,000 a year for four years.• There’s a 40% chance that the market will be weak and the expected after-tax CFs willbe $25,000 a year for four years.• Project’s initial after-tax cost (at t=1) will still be $100,000.Should the company go ahead with the project today or wait for one more year? please show work.
Project Falcon has an upfront after-tax cost of $100,000. The project is expected to produceafter-tax cash flows of $35,000 at the end of each of the next four years. The project has aWACC of 11%.However, if the company waits a year, they will find out more information about marketcondition and its effect on the project’s expected after-tax cash flows. If they wait a year,• There’s a 60% chance that the market will be strong and the expected after-tax CFs willbe $45,000 a year for four years.• There’s a 40% chance that the market will be weak and the expected after-tax CFs willbe $25,000 a year for four years.• Project’s initial after-tax cost (at t=1) will still be $100,000.Should the company go ahead with the project today or wait for one more year? please show work.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter14: Real Options
Section: Chapter Questions
Problem 4MC
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Question
Project Falcon has an upfront after-tax cost of $100,000. The project is expected to produce
after-tax cash flows of $35,000 at the end of each of the next four years. The project has a
WACC of 11%.
However, if the company waits a year, they will find out more information about market
condition and its effect on the project’s expected after-tax cash flows. If they wait a year,
• There’s a 60% chance that the market will be strong and the expected after-tax CFs will
be $45,000 a year for four years.
• There’s a 40% chance that the market will be weak and the expected after-tax CFs will
be $25,000 a year for four years.
• Project’s initial after-tax cost (at t=1) will still be $100,000.
Should the company go ahead with the project today or wait for one more year?
after-tax cash flows of $35,000 at the end of each of the next four years. The project has a
WACC of 11%.
However, if the company waits a year, they will find out more information about market
condition and its effect on the project’s expected after-tax cash flows. If they wait a year,
• There’s a 60% chance that the market will be strong and the expected after-tax CFs will
be $45,000 a year for four years.
• There’s a 40% chance that the market will be weak and the expected after-tax CFs will
be $25,000 a year for four years.
• Project’s initial after-tax cost (at t=1) will still be $100,000.
Should the company go ahead with the project today or wait for one more year?
please show work.
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