25) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years
ID: 2654747 • Letter: 2
Question
25) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years, and a 25% chance of returning $25 for 7-years. Based on the above data, what is the project's net present value?
Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
-$1,312,456
-$1,104,607
-$875,203
$105,999
e) $321,788
26) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years, and a 25% chance of returning $25 for 7-years.
Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
a) $77.23
b) $85.81
$95.34
d) $105.94
e) $116.53
a)-$1,312,456
b)-$1,104,607
c)-$875,203
d)$105,999
e) $321,788
Explanation / Answer
Initial investment 1500 1500 Pv factor for 7 years 1/1.1^1+….1/1.1^7 4.86 Return of $500 =500*4.86 2430 Return of $25 =25*4.86 121.5 Total NPV =(2430*0.75+121.5*0.25)-1500 352.875
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