Question
Tut.com is considering a plan to develop an online finance tutoring package, at the cost ($13000) and with revenue forecasts of $2000 for each of
Tut.com is considering a plan to develop an online finance tutoring package, at the cost ($13000) and with revenue forecasts of $2000 for each of the next five years. One of Tut's larger competitors, Online Professor (OP), is expected to do one of two things in Year 5: (1) develop its own competing program, which will put Tut's program out of business, or (2) offer to buy Tut's program if it decides that this would be less expensive than developing its own program. Tut thinks there is a 45% probability that its program will be purchased for $12500 and a 55% probability that it won't be bought, and thus the program will simply be closed down with no salvage value. What is the estimated net present value of the project at a WACC = 3.2%, if we consider the potential future purchase?
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