Question
You are trying to decide among two mutually exclusive projects: a safe project (S); and a risky project (R). Both projects require an initial investment
You are trying to decide among two mutually exclusive projects: a safe project (S); and a risky project (R). Both projects require an initial investment of $1,000.
Project S allows you to produce and sell a good that costs $25 per unit to produce (all variable costs) and that will sell for $40. Demand is 200 units.
Project R allows you to produce and sell a good that costs $25 per unit to produce (all variable cost) and that will sell for either $70 or $12. Demand is 200 units. The price will be high or low with equal probability and you won't know the price until after you invest the initial $1,000, but before you commit to production and incur any additional costs.
Project S has a cost of capital of 20%. Project R has a cost of capital of 50%. Cash flows from production and sales occur one year after the initial investment.
Q.What is the NPV of project S?
Q.What is the NPV of project R?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the Net Present Value NPV of Project S and Project R well follow these steps 1 Calculat...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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