Question

1. The price of a unit to be manufactured can follow one of three poten- tial paths with equal probability:

Path	Period 0	Period 1	Period 2
Path A	$35.00	$40.00	$45.00
Path B	$35.00	$40.00	$40.00
Path C	$35.00	$35.00	$35.00
Path D	$35.00	$30.00	$25.00

a. What is the NPV of a project that will allow the firm to manufacture 200 units each year for Periods 1 and 2, assuming a cost of $12,800.00 and a discount rate of 10%? 


Expected Cash Inflow =                                  Net Present Value =

b. Assuming that half the cost ($6,400.00) can be spent now and the rest after Period 1, what is the NPV now? 


Net Present Value =

c. Suppose that after Period 1 the price is $35.00 or $30.00, then what is the NPV of investing the second half of the $12,800.00? 


NPV (Price is $35.00) =                                  NPV (Price is $30.00) =

d. Suppose that after Period 1 the price is $40.00, then what is the NPV of investing the second half of the $12,800.00? Is the 10% discount rate appropriate here? 


NPV ($40.00) = $

Answer 1