Jennifer K. is analyzing a project and has determined that the initial cost will be $1,519,000...

Jennifer K. is analyzing a project and has determined that the initial cost will be $1,519,000 and the required rate of return needs to be 14 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 $261,000. If the project succeeds, the annual after-tax cash flow will be $684,000. 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 $530,000. If however, the project is a success, she can expand it with no additional investment and increase the after-tax cash flow to $712,000 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? $210,419.21 $176,737.63 $235,844.96 $229,842.11 $185,006.33

Expert Solution

In the above question, first we will calculate the present values of inflows, in both the circumstances i.e. success and failure of project. Afterwards, we will calculate the total inflows by allocating weights of 60 % to inflows if success and 40% to inflows if fail.

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jeff jeffy answered 11 months ago

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