Question
Ozone Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The projects subsequent cash flows are critically dependent on
Ozone Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The projects subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200s expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200s expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%. Based on the above information, what is the F-200s expected net present value?
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