Adequate information: Price per unit = $43 Quantity sold in case of success = 18,200 units Quantity sold in case of failure = 9,100 units Discount rate (r) = 16% Time period (t) = 9 years Abandonment value = $810,000 Probability of failure of the project = 0.50 Operating cash flow (OCF) = $279,500 Cost of the project (C) = $980,000 To determine: The NPV of the project if success and failure are equally likely as well as the value of the option. Introduction: NPV refers to the difference between the aggregate value of cash inflows and the aggregate value of cash outflows. It is a capital budgeting technique used to evaluate investment proposals.

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Chapter 7, Problem 19QAP

Summary Introduction

Adequate information:

Price per unit = $43

Quantity sold in case of success = 18,200 units

Quantity sold in case of failure = 9,100 units

Discount rate (r) = 16%

Time period (t) = 9 years

Abandonment value = $810,000

Probability of failure of the project = 0.50

Operating cash flow (OCF) = $279,500

Cost of the project (C) = $980,000

To determine: The NPV of the project if success and failure are equally likely as well as the value of the option.

Introduction: NPV refers to the difference between the aggregate value of cash inflows and the aggregate value of cash outflows. It is a capital budgeting technique used to evaluate investment proposals.

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