Question
The XY Company has net income of $50,000,000 per year on stock equity of $500,000,000. The firm has a chance to invest $80,000,000 in an
The XY Company has net income of $50,000,000 per year on stock equity of $500,000,000. The firm has a chance to invest $80,000,000 in an investment that has an expected internal rate of return of 0.50. If the project is successful it will earn$40,000,000 per year for perpetuity. The probability of being successful is 0.20. If the investment is not successful it will earn zero cash flows. There is a 0.8 probability that it will not be successful. A loss of $80,000,000 would be awkward but the firm could probably survive. Should the investment be accepted?
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