Question
Campbell Equipment Rental is considering the purchase of a new piece of construction equipment to lease to customers. The equipment costs $750,000, but the net
Campbell Equipment Rental is considering the purchase of a new piece of construction equipment to lease to customers. The equipment costs $750,000, but the net cash flow generated by equipment rental depends on the conditions in the construction market.
Campbell's CFO estimates that construction activity will be high with a probability of 75% , and with high construction activity leasing the piece of equipment will generate $200,000 per year for the next 7 years. If construction activity is low (25% probability), leasing the equipment will generate $50,000 per year for the next 7 years.
Now assume that Campbell could sell the piece of equipment for $500,000 at the end of the first year, after receiving the first year's rental income.
What is the expected NPV of the project after considering the abandonment option?
Group of answer choices
160,710
- 54,870
- 2,564
57,331
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