If MacCaugh’s pilot project is successful, it will be able to build a plant with an...

If MacCaugh’s pilot project is successful, it will be able to build a plant with an NPV of $2 million in 1 year’s time. Otherwise the pilot investment will be valueless. If the discount rate is 20% and the chances of success are 50%, how much can MacCaugh afford to spend on the pilot project?

A. $1 million.

B. $2 million.

C. $1.667 million.

D. $833,333.

Expert Solution

NPV of the project ( at T = 0 ) = Weighted average of present value of NPV

= 50% * [ 2,000,000 / 1.20 ] + 50% * 0

= 50% * 1,66,666.67

= $ 833,333.33 Answer

Option D is correct.

jeff jeffy answered 2 years ago

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