Question

QUESTION 15 VFIC Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $500,000 and last for one year. The management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then VFIC will invest $3 million to build a plant immediately that will generate expected annual after-tax cash flows of $400,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity starting in year two. VFIC's cost of capital is 10%. Suppose that VFIC has the option to sell the prototype mountain bike at the end of the first year for $300,000. The NPV of the VFIC Mountain Bike Project is around:

A. $90,909 B. $204,545 C. $455,000 D. -$45,455 E. None of the above

Answer 1