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Can you find the correct answer using the BA2Plus Calculator? 7. HCB, Inc. is considering investing in a new We tried really hard but lost!
Can you find the correct answer using the BA2Plus Calculator?
7. HCB, Inc. is considering investing in a new "We tried really hard but lost!" bobble head machine. If UT loses the SEC Championship, these should sell like hotcakes and the cash flows will be $40,000 per year for 5 years. The probability of losing is 80%. If UT wins the championship, then these won't sell well and the cash flows will be $20,000 per year for 5 years. The probability of UT winning the SEC championship is 20%. It will cost $100,000 to purchase the equipment. Investment must occur now. However, if UT wins the championship and the bad cash flows occur, HCB can simply shut down the production process after a year of bad cash flows and sell the equipment for $50,000. This selling price is known with certainty. The risk free rate is 6% and the cost of capital is 10%. Use a decision tree to find the NPV of the investment opportunity including the abandonment option. \begin{tabular}{ll} a. & 25,748 \\ b. & 26,561 \\ c. & 27,103 \\ \hline d. & 27,916 \\ e. & 29,000 \end{tabular} Step by Step Solution
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