Give typing answer with explanation and conclusion Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and testmarketing phase will last for one year and cost $500,000. Your management team believes that there is a 50% chance that the test marketing will be successful and thatthere will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then Kinston Industries will invest $3 million in year one to build aplant that will generate expected annual after-tax cash flows of $400,000 in perpetuilty beginning in year two. If the test marketing is not successful, Kinston can still goahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two. Kinston has the option to stopthe project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. Kinston's cost of capital is 10%.Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to:A $90,000OB $590,000C$455,000OD. $45,000

Given:Case1 - If the test-marketing phase is successful, and expected perpetuity from year…

Answered: Q. Assuming that Kinston has the…

Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Give typing answer with explanation and conclusion

Kinston Industries has come up with a new mountain bike 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 $500,000. Your management team believes that there is a 50% chance that the test marketing will be successful and that
there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then Kinston Industries will invest $3 million in year one to build a
plant that will generate expected annual after-tax cash flows of $400,000 in perpetuilty beginning in year two. If the test marketing is not successful, Kinston can still go
ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two. Kinston has the option to stop
the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. Kinston's cost of capital is 10%.
Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to:
A $90,000
OB $590,000
C$455,000
OD. $45,000

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