Triptych Food Corp. is looking at investing in a production facility that will r

Question

Triptych Food Corp. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three year useful life, and it will not have any salvage value at the end of the project's life. If demand is strong, the facility will be able to generate annual cash flows of $250,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $120,000. Triptych food corp thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. IF the company uses a project cost of capital of 11%, what will be the expected net present value of this project? a. -31,143 b. -40,726 c. -47, 913 d. -33,539 Triptych food corp could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the company switches product lines because of low demand, it will be able to generate cash flows of $245,000 in years 2 and 3 of the project. What is the expected NPV of this project if Triptych Food Corp decides to invest the additional $10,000 to give themselves a flexibility option? a. 38, 513 b. 77, 783 c. 86, 426 d. 34, 570 What will be the value of Triptych Food Corp.'s flexibility option? a. 34,662 b. 34,570 c. 77,783 d. 86,426 e. 38,513 Please help me understand this three part question, thank you so much.

Explanation / Answer

Therefor option c is correct.

For second part and third part answer is same as they mean the same thing.that is 38513 as computed above.

Particulars 0 Strong Weak Machine Purchased (-) (a) $ (500,000.00) Net operating profit after taxes (b) $ (500,000.00) $ 250,000.00 $ 120,000.00 Discount factor @ 11% AND SUM OF ANNUITIES for strong and weak condition ©                     1.00                 2.444                 2.444 Discounted value (b) X © =(d) $ (500,000.00) $ 610,928.68 $ 293,245.77 Probability of happening (e)                   0.50                   0.50 Expected cash flow         55,464.34    (103,377.12)      (47,912.78)

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