Question
Consider the following project data: A Shs 10 million feasibility study will be conducted at t =0. If the study indicates potential, the firm will
Consider the following project data: A Shs 10 million feasibility study will be conducted at t =0. If the study indicates potential, the firm will spend Shs 30 million at t= 1 to build a prototype. The best estimate is that there is an 70% chance that the study will indicate potential and 30% chance that it will not. If reception of the prototype is good the firm will spend Sh. 400 million to build a production plant at t=2. The best estimate is that there is a 40% chance that the prototypes reception will be poor. If the plant is built, theres a 65% chance of a t=3 cash inflow of Shs 800 million and a 35% chance of Shs 450 million cash inflow. If the inflow at t=3 is Shs 800 million, there are 25% and 75% chances of Shs 350 million and Shs 200 million inflows respectively at t=4. If the inflow at t=3 is Shs 450 million, there are 55% and 45% chances of Shs 320 million and Shs 220 million inflows respectively at t=4. The plant has a salvage value of Shs 150 million at t=5. If the appropriate cost of capital is 14.5% what is the projects expected NPV
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