NPV Tony and Franzi, after graduating from the DMBA program, decide to launch a
ID: 2499676 • Letter: N
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NPV Tony and Franzi, after graduating from the DMBA program, decide to launch a venture "Likable Lunches." To do this, Franzi would need to invest $1,000 at t=0 for the ingredients and menu development for these lunches. The assumption is that there is a 70% chance that this phase will be successful and will continue. If this stage is not successful, the lunch project would be scrapped with no left overs :( The second stage would consist of designing packaging and delivery of these lunches. This is estimated to cost $25,000 at t =1. If the lunch design and delivery test well, Franzi and Tony would then go into production. If they do not, the designs could be sold for $5,000. Success for the second stage is estimated at 85%. The third and final stage consists of purchasing an old Delmonte plant for lunch production. This would cost $200,000 at t =2. If the lunch economy is strong, the net value of sales would be $600,000; if the lunch economy is in recession, the net value would be $300,000. There's a 50-50 chance of strong or weak lunch economy. Franzi's and Tony's Cost of Capital is 10%. What is Franzi's and Tony's expected NPV? NPV Tony and Franzi, after graduating from the DMBA program, decide to launch a venture "Likable Lunches." To do this, Franzi would need to invest $1,000 at t=0 for the ingredients and menu development for these lunches. The assumption is that there is a 70% chance that this phase will be successful and will continue. If this stage is not successful, the lunch project would be scrapped with no left overs :( The second stage would consist of designing packaging and delivery of these lunches. This is estimated to cost $25,000 at t =1. If the lunch design and delivery test well, Franzi and Tony would then go into production. If they do not, the designs could be sold for $5,000. Success for the second stage is estimated at 85%. The third and final stage consists of purchasing an old Delmonte plant for lunch production. This would cost $200,000 at t =2. If the lunch economy is strong, the net value of sales would be $600,000; if the lunch economy is in recession, the net value would be $300,000. There's a 50-50 chance of strong or weak lunch economy. Franzi's and Tony's Cost of Capital is 10%. What is Franzi's and Tony's expected NPV?Explanation / Answer
t0($1,000)
t1($25,000) design sold for $5,000
t2($2,00,000) sales value=$6,00,000*0.5+$3,00,000*0.5=$4,50,000
cost of capital=10%
expected npv=present value of cash inflows - present value of cash outflows
discounting factors for 3 years @10%:
year 1=0.909
year 2=0.826
year 3=0.751
cost $200,000 at t =2.
cost $200,000 at t =2.
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