Question
Question 2. You are considering setting up a firm to produce gadgets. The demand for gadgets can be high, medium, or low with equal probability.
Question 2. You are considering setting up a firm to produce gadgets. The demand for gadgets can be high, medium, or low with equal probability. The corresponding cash flows are: Demand Annual Cash Flows High 600 Medium 0 Low -600 These cash flows will begin one year after the investment is made and continue forever. The cost of the project is $300 today. The discount rate is 50% (yes, that's not a typo). a) What is the NPV of the project?
Answer: NPV = -300 + (1/3)(600/0.5) + (1/3)(0/0.5) + (1/3)(-600/0.5) = -300
why divided by 0.5 instead of 1.5?
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
