Winters Corp, is considering a new product that would require an investment of $

Question

Winters Corp, is considering a new product that would require an investment of $20 million now, at t=0 If the new product is well received, then the project would produce after tax cash -flows of $I0 million at the end of each of the next 3 years (t=1, 2,3), but if the market did not like the product, then the cash MINN would be only S4 million per year. There is a 50% probability that the market will be good The firm could delay the project for a year while it conducts a test to determine if the demand is likely to be strong or weak, but it would have to incur costs to obtain this timing option The project cost and expected annual cash flows would be the same whether the project is delayed or not The project WACC is 11.0% What is the value in (thousands) of the option to delay the project?

Explanation / Answer

there is 50% chance of 10 m

NPV at year 1 =- 20+10/1.11+(10/1.11^2)+(10/1.11^3)=4.43714715 million or $4437147.155

there is 50% chance of 4m

NPV at year 1 = -20+4/1.11+(4/1.11^2)+(4/1.11^3)= -10.22514

since NPV is negative we will not accpet this project.

value of project at year 0 or today= (.5x4437147.155)/1.11= $1998714.93 or 1998715

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.