1. Kamath Products Inc. (KPI) is considering a project that requires an initial investment of $4.5 million at t = 0.If the company proceeds with the project, it will produce positive cash flows for 4 years.The future cash flows depend critically on an upcoming regulatory ruling.If the company proceeds with the project today and the regulatory ruling is favorable, the project is expected to produce cash flows of $3.2 million at the end of each of the next 4 years (t = 1, 2, 3, and 4).But if the company proceeds with the project and the regulatory ruling is unfavorable, the project is expected to produce cash flows of only $0.60 million at the end of each of the next 4 years (t = 1, 2, 3, and 4).The company assumes that there is a 55% chance that the ruling will be favorable.All cash flows are discounted at 9%.

a.If the company proceeds today, what is the project's expected net present value?

As an alternative to proceeding today, the company is considering waiting a year to see the outcome of the regulatory ruling.The company estimates that if it waits a year and then decides to proceed, the initial investment at t = 1 will be $6 million.The company also estimates that if it waits a year, the cash inflows from the project will remain the same (but will obviously be pushed forward one year).In other words, if the company waits a year to proceed and the regulatory ruling is favorable, the project will produce cash flows of $3.2 million at the end of the next 4 years (t = 2, 3, 4, and 5); however, if the regulatory ruling is unfavorable, the cash inflows will be $0.60 million at the end of each of the next 4 years (t = 2, 3, 4, and 5).

Note that if the company waits a year and decides not to proceed with the project, it will not have to invest any capital.Again, assume that all cash flows are discounted at 9% and that the probability of a favorable outcome remains 55%.

b.Should the company proceed with the project today, or should it wait to discover the outcome of the regulatory ruling?

_________ Proceed with project today_________ Wait 1 year for ruling

What is the net advantage or disadvantage of waiting a year?In other words, how much will this increase or decrease the project's value to shareholders?