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allen is analyzing a project and has determined that the initial cost will be $760,000 and...

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Finance

allen is analyzing a project and has determined that the initialcost will be $760,000 and the required rate of return needs to be12 percent. The project has a 60 percent chance of success and a 40percent chance of failure. If the project fails, it will generatean annual after-tax cash flow of $150,000. If the project succeeds,the annual after-tax cash flow will be $306,000. She has furtherdetermined that if the project fails, she will shut it down afterthe first year and sell the equipment for the after-tax salvagevalue of $300,000. If however, the project is a success, she canexpand it with no additional investment and increase the after-taxcash flow to $326,000 a year for Years 2-5. At the end of Year 5,the project would be terminated and have no salvage value. What isthe expected net present value of this project at Time 0?

$149,588.92

$110,676.38

$74,356.72

$95,094.23

$127,410.88

Answer & Explanation Solved by verified expert
4.2 Ratings (462 Votes)

Year Probable cash flow if success Probable cash flow if fail total cash flow PV Factor PV of cash flow
0 $        -7,60,000 1 $   -7,60,000.00
1 $                                        1,80,000 $                               1,83,600 $          3,63,600 0.892857 $     3,24,642.86
2 $                               1,95,600 $          1,95,600 0.797194 $     1,55,931.12
3 $                               1,95,600 $          1,95,600 0.71178 $     1,39,224.22
4 $                               1,95,600 $          1,95,600 0.635518 $     1,24,307.34
5 $                               1,95,600 $          1,95,600 0.567427 $     1,10,988.69
Net present vlaue 95094.23
Correct Option : THIRD
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