Question
A6-1 Calculate the expected net present value of a project that will cost $100,000 at time zero, considering there is a 60% chance that the
A6-1
Calculate the expected net present value of a project that will cost $100,000 at time zero, considering there is a 60% chance that the investment at time zero will be successful, which will require an additional investment of $200,000 at year one. There is a 90% chance of success of the year one investment yielding profits over a six-year period (years two through seven) equal to $175,000 per year. Failure at time zero will result in an abandonment cost of $80,000 at year one and failure at year one will result in a salvage value of $150,000 at year two. Should this project be considered from an economic viewpoint if the minimum rate of return is 15%? Compare your expected NPV result with risk-free NPV.
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