Question
A company is considering investing in a new product line. The expected annual revenue from the product line is $5 million, but there is a
A company is considering investing in a new product line. The expected annual revenue from the product line is $5 million, but there is a 20% chance that the actual revenue will be only $2 million due to market uncertainties. The company will incur fixed costs of $1 million per year, regardless of the revenue. The variable cost of producing the product is $1 million if the revenue is $5 million, but will increase to $2 million if the revenue is only $2 million. If the company uses a 10% discount rate to evaluate the investment, what is the expected net present value (NPV) of the project, and what is the probability that the project will have a negative NPV?
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Managerial Economics A Problem Solving Approach
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