Question
A company is signing a contract to buy a number of components for a 10 unit price.These can be resold after one year at a
A company is signing a contract to buy a number of components for a 10 unit price.These can be resold after one year at a 12 unit price if demand turns out to bestrong,and at a 8 price if demand is weak. Market conditions (strong or weakdemand) will only be observed in 3 months; the company currently assigns equalchances to either occurrence. Assume also that the order can be cancelled within 6months without penalty and that the relevant discount rate is 10%.Which one of thefollowing statements is the most accurate?
a.The company should not sign the contract because the project has a negative NPV
b.The company should sign the contract, as there are good chances that it might beable to sell the sourced components at a profit.
c.The company should sign the contract,since it should take into account thevalue of the option to abandon the project.
d.The company is indifferent,since the expected unit price across the two statesallows it to just break even.
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