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Eclipse, Inc., has a new project under consideration that will require an investment of $6.9 million...

Eclipse, Inc., has a new project under consideration that will require an investment of $6.9 million today. If the project is successful, the cash flows will be $2.6 million for 12 years. If the project is unsuccessful, the cash flows will be $285,000 per year. Additionally, the company could sell the project’s fixed assets in one year and realize an aftertax salvage value of $4.7 million. The required return is 16 percent. What is the minimum probability of success that will make the project acceptable to the company?

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Expert Solution

Calculate the Answer in excel by Calculating the net cash flow as = Prob of Success * 2600000 + (1- Prob of Success)* 285000

Therefore the companu will accept the project if they have a positive NPV @ 16% discount rate.

Prob of A 0.4504
A B Prob of B 0.5496
Year Investment Successful Cash Flow Unsuccessful Cash Flow Net Cash flow Discount factor Discounted Cash Flow
0 6900000 -6900000 1                         -69,00,000
1 2600000 285000 1327676 0.86207                           11,44,548
2 2600000 285000 1327676 0.74316                             9,86,680
3 2600000 285000 1327676 0.64066                             8,50,586
4 2600000 285000 1327676 0.55229                             7,33,264
5 2600000 285000 1327676 0.47611                             6,32,124
6 2600000 285000 1327676 0.41044                             5,44,934
7 2600000 285000 1327676 0.35383                             4,69,771
8 2600000 285000 1327676 0.30503                             4,04,975
9 2600000 285000 1327676 0.26295                             3,49,116
10 2600000 285000 1327676 0.22668                             3,00,962
11 2600000 285000 1327676 0.19542                             2,59,450
12 2600000 285000 1327676 0.16846                             2,23,664
NPV                                         75

Therefore Prob of success at which the NPV is just positive is 45.04% or .4504

jeff jeffy answered 1 year ago
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