Your company is considering a project that has an up-front cost at Year 0 of $500.000 and a cost of capital of 8 percent. The project's subsequent cash flows are uncertain. There is a 70 percent chance that the project will be successful and generate a cash flow of $250,000 at the end of each of the next ten years (Years 1-10), while there is a 30 percent chance that the project will not be successful and will only generate cash flows of $30,000 over each of the next five years (Years 1-5). As you can calculate, the net present value of taking on the project today (Year O) is $710,198.64. If your company delays taking on the project for one year (takes it on at Year 1), it can determine whether the cash flows will be $250,000 for the next ten years (Years 2-11), or $30,000 for the next five years (Years 2-6) by doing additional market research. Unfortunately, the market research, penalties for contract delays, and inflation, will raise the price of taking on this project to $550.000 at Year 1. Based on this information, and assuming that the relevant risk-adjusted discount rate remains at 8 percent, determine how much delaying the project will increase or decrease the project's expected NPV in today's dollars (Year 0), relative to the project's NPV if it proceeds today. O $18.128.44 O $19.049.92 O $20.601.59 O $17.757.00
Your company is considering a project that has an up-front cost at Year 0 of $500.000 and a cost of capital of 8 percent. The project's subsequent cash flows are uncertain. There is a 70 percent chance that the project will be successful and generate a cash flow of $250,000 at the end of each of the next ten years (Years 1-10), while there is a 30 percent chance that the project will not be successful and will only generate cash flows of $30,000 over each of the next five years (Years 1-5). As you can calculate, the net present value of taking on the project today (Year O) is $710,198.64. If your company delays taking on the project for one year (takes it on at Year 1), it can determine whether the cash flows will be $250,000 for the next ten years (Years 2-11), or $30,000 for the next five years (Years 2-6) by doing additional market research. Unfortunately, the market research, penalties for contract delays, and inflation, will raise the price of taking on this project to $550.000 at Year 1. Based on this information, and assuming that the relevant risk-adjusted discount rate remains at 8 percent, determine how much delaying the project will increase or decrease the project's expected NPV in today's dollars (Year 0), relative to the project's NPV if it proceeds today. O $18.128.44 O $19.049.92 O $20.601.59 O $17.757.00
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Your company is considering a project that has an up-front cost at Year 0 of $500,000 and a cost of
capital of 8 percent. The project's subsequent cash flows are uncertain. There is a 70 percent chance
that the project will be successful and generate a cash flow of $250,000 at the end of each of the
next ten years (Years 1-10), while there is a 30 percent chance that the project will not be successful
and will only generate cash flows of $30,000 over each of the next five years (Years 1-5). As you can
calculate, the net present value of taking on the project today (Year 0) is $710,198.64.
If your company delays taking on the project for one year (takes it on at Year 1), it can determine
whether the cash flows will be $250,000 for the next ten years (Years 2-11), or $30,000 for the next
five years (Years 2-6) by doing additional market research. Unfortunately, the market research,
penalties for contract delays, and inflation, will raise the price of taking on this project to $550,000
at Year 1. Based on this information, and assuming that the relevant risk-adjusted discount rate
remains at 8 percent, determine how much delaying the project will increase or decrease the
project's expected NPV in today's dollars (Year O), relative to the project's NPV if it proceeds today.
$18.128.44
O $19,049.92
O $20.601.59
O $17,757.00
$22.874.98
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education