16. Finance. Please provide complete and correct solution done on computer or by hand with mathematical proof/explanation to all questions. Please, emphasis on complete and correct solution. The answers will be verified. This is all the information provided. Thank you very much.

Please state explicitly any assumptions that you think are necessary to solve this problem.

The Aye, Matey Spirits Company is proposing to make and sell a new product: diet rum. The new diet rum product will first be test-marketed for one year in Miami, Florida, at an initial cost of $600,000. This test launch is not expected to produce any profits; but the company believes that there is a 60 percent chance that demand will be sufficiently large for it to proceed with selling this beverage nationwide. If so, Aye, Matey Spirits Company will spend $5 million to build a new plant, and it would expect to receive an annual profit of $800,000 for many years. If the demand is too small, or if the companys chemical engineers can not figure out how to scale-up their new separation process for selectively removing calories, then the diet rum project will be terminated. For its established beverages, the Aye, Matey Spirits Company seeks an annual return of at least 10% on its investments.

a) After consuming several glasses of the new diet rum, one of the companys accountants merrily suggests that because theres only a 60% chance of success, there should be a 40% risk premium (representing the chance of failure) that should be applied to the discount rate for the diet rum project. Calculate the present value of the project using this risk-adjusted discount rate.

b) Explain if there is a better way to calculate the present value of the proposed diet rum project.

c) If your answer to part b) is yes, calculate the present value of the proposed diet rum project accordingly.