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Question 10 (CHAPTERS 22-23) You and your brothers have just had a great idea for a new product, and you would like to try to bring it to life. You would need to immediately spend $35,000. Your pro-forma calculations show that an estimated $5,000 would be coming in each year in after-tax profits for the next 8 years. You believe 10% is appropriate to use for the discount rate. Invest NO HINT: You will not need to use some numbers that are given in this problem! 25 pts Yes Unfortunately, according to these numbers the NPV of this pilot project is negative (which can be verified). Fortunately, though, you and your brothers completely disagree on how much profit may be coming in each year. The volatility of these annual profits is 54%. What this means is that if for this pilot project the profits turn out much higher, then you all agree that expanding this business might make a lot of sense. The expansion would involve adding 10 more of such products to your production line and this would take place when the first 8-year pilot product project is over. 10000 In general, a lower volatility (see given) [Select] the project expansion. In order to calculate the value of the possibility of this expansion one can use the Black-Scholes formula. In this formula, the equivalent of the "current stock price" equals [Select] which is nothing but [Select] en [Select] e p en makes it more worth it to do makes it less worth it to do is irrelevant because it has no effect on mich is nothing but [Select] ct e B HI [Select ] $94,760 $99,351 $107,736 $109,363 $115,439 $117,235 $124,439 $127,926 10 r u gi [ Select] the initial cost of all new products the initial cost of all new products, discounted back from the year of the expansion current value of total cash inflows from all new products current value of total cash inflows from all new products less their total initial cost total cash inflows from all new products total cash inflows from all new products less their total initial cost Question 10 (CHAPTERS 22-23) You and your brothers have just had a great idea for a new product, and you would like to try to bring it to life. You would need to immediately spend $35,000. Your pro-forma calculations show that an estimated $5,000 would be coming in each year in after-tax profits for the next 8 years. You believe 10% is appropriate to use for the discount rate. Invest NO HINT: You will not need to use some numbers that are given in this problem! 25 pts Yes Unfortunately, according to these numbers the NPV of this pilot project is negative (which can be verified). Fortunately, though, you and your brothers completely disagree on how much profit may be coming in each year. The volatility of these annual profits is 54%. What this means is that if for this pilot project the profits turn out much higher, then you all agree that expanding this business might make a lot of sense. The expansion would involve adding 10 more of such products to your production line and this would take place when the first 8-year pilot product project is over. 10000 In general, a lower volatility (see given) [Select] the project expansion. In order to calculate the value of the possibility of this expansion one can use the Black-Scholes formula. In this formula, the equivalent of the "current stock price" equals [Select] which is nothing but [Select] en [Select] e p en makes it more worth it to do makes it less worth it to do is irrelevant because it has no effect on mich is nothing but [Select] ct e B HI [Select ] $94,760 $99,351 $107,736 $109,363 $115,439 $117,235 $124,439 $127,926 10 r u gi [ Select] the initial cost of all new products the initial cost of all new products, discounted back from the year of the expansion current value of total cash inflows from all new products current value of total cash inflows from all new products less their total initial cost total cash inflows from all new products total cash inflows from all new products less their total initial cost