Question
Shoe Building Inc. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for
Shoe Building Inc. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $60,000 and $5,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions.
If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is ? $65,696. $35,834. $56,738. $59,724.
(Note: Do not round intermediate calculations and round your answer to the nearest dollar.) Shoe Building Inc. wants to take a potential growth option into account when calculating the projects expected NPV. If conditions are good, the firm will be able to invest $5,000 in year 2 to generate an additional cash flow of $18,000 in year 3. If conditions are bad, the firm will not make any further investments in the project.
Using the information from the preceding problem, the expected NPV of this projectwhen taking the growth option into accountis ? $64,859. $81,074. $61,616. $84,317.
(Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
Shoe Building Inc.s growth option is worth ? $5,135. $4,622. $5,905. $4,365. $6,162.
(Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started