Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Intro Pearson is considering the development of a new online platform. The initial cost of the project is $41 million, including programming, testing and content
Intro Pearson is considering the development of a new online platform. The initial cost of the project is $41 million, including programming, testing and content development. The company has a weighted average cost of capital of 9%. There is a 30% probability that demand will be strong, 40% that it will be normal and 30% that it will be weak. The expected cash flows for each case are given below. After 6 years, cash flows are expected to decrease at a constant rate forever. D A 1 WACC 2 0.09 0.3 3 Demand Strong Normal Weak 4 Probability 0.4 0.3 5 6 Cash flows ($M) 7 Year Strong Normal Weak 8 0 -41 -41 -41 9 1 10 7 3 3 10 2 14 10 11 3 16 11 6 4 17 11 12 13 6 3 5 17 10 3 14 6 16 6 15 16 Growth rate after year 6 -5% -10%-25% Part 1 IB Attempt 1/10 for 10 pts. What is the expected NPV of the project (in $ million)? 1+ decimals Submit Part 2 IB Attempt 1/10 for 10 pts. Now assume that the company can study the market for the new platform. The market study takes a year, costs $1.5 million and will reveal if demand will be strong, normal or weak. If the company accepts the project after one year, the cash flows will be the same, just shifted back by one year (forever growth/decline starts after year 7). What is the NPV of the project with the option to delay (in $ million)? 1+ decimals Submit Part 3 IB Attempt 1/10 for 10 pts. What is the value of the option to delay (in $ million)? 2+ decimals Submit
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started