Question

allen is analyzing a project and has determined that the initial cost will be $760,000 and the required rate of return needs to be 12 percent. The project has a 60 percent chance of success and a 40 percent chance of failure. If the project fails, it will generate an annual after-tax cash flow of $150,000. If the project succeeds, the annual after-tax cash flow will be $306,000. She has further determined that if the project fails, she will shut it down after the first year and sell the equipment for the after-tax salvage value of $300,000. If however, the project is a success, she can expand it with no additional investment and increase the after-tax cash flow to $326,000 a year for Years 2-5. At the end of Year 5, the project would be terminated and have no salvage value. What is the expected net present value of this project at Time 0?

		$149,588.92
		$110,676.38
		$74,356.72
		$95,094.23
		$127,410.88

Answer 1

Year	Probable cash flow if success	Probable cash flow if fail	total cash flow	PV Factor	PV of cash flow
0			$        -7,60,000	1	$   -7,60,000.00
1	$                                        1,80,000	$                               1,83,600	$          3,63,600	0.892857	$     3,24,642.86
2		$                               1,95,600	$          1,95,600	0.797194	$     1,55,931.12
3		$                               1,95,600	$          1,95,600	0.71178	$     1,39,224.22
4		$                               1,95,600	$          1,95,600	0.635518	$     1,24,307.34
5		$                               1,95,600	$          1,95,600	0.567427	$     1,10,988.69
	Net present vlaue				95094.23
	Correct Option : THIRD