Question
Broadway Inc. is considering a new musical. The initial investment required is $880,000. Every year, the free cash flow from the project is expected to
Broadway Inc. is considering a new musical. The initial investment required is $880,000. Every year, the free cash flow from the project is expected to be $80,000, continuing forever.
a). What is the NPV of the project?
b). In fact, the annual cash flow of $80,000 is an expected value: there is a 50% chance that annual cash flow will be $180,000 and a 50% chance that it will be -$20,000. What is the expected NPV of the project if the company cannot abandon the project?
c). What is the true NPV of the project if the company can abandon the project after the first year?
d). What is the value of the option to abandon?
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Get StartedRecommended Textbook for
Financial Theory and Corporate Policy
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
4th edition
321127218, 978-0321179548, 321179544, 978-0321127211
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