Question
Jingle Sales is considering expanding into a new product line. The net cost of the expansion is $752 now. The firm won't know the level
Jingle Sales is considering expanding into a new product line. The net cost of the expansion is $752 now. The firm won't know the level of profit until t=1. All sales and costs are recorded at the end of the year. If there is an economic boom, after-tax profit will be $197. If there is a prolonged recession, after-tax profit will be $38. Otherwise after-tax profit will be $123. It is expected that each economic scenario has an equal probability of occurring. Management also expects that the profit level experienced at t=1 will continue in perpetuity. The discount rate is 11.2%. The firm has an option to abandon the project at t=1 after it sees the level of profit. If Jingle Sales abandons the project, it can recover $519 of its original investment immediately. What is the net present value now of the project, including the option to abandon?
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