Roy is analyzing a 5-year project with an initial cost of $210,000,a required return of 16 percent,and a probability of success of 62 percent.If the project fails,it will generate an annual after-tax cash flow of -$48,500.If the project succeeds,the annual after-tax cash flow will be $79,000.He has further determined that if the project fails,he will shut it down after the first year and lose all of his original investment.If,however,the project is a success,he can expand it with no additional investment and increase the after-tax cash flow to $154,000 a year for Years 2-5.At the end of Year 5,the project would be terminated and have no salvage value.What is the net present value of this project at Time 0?

Question

Quizplus · Accepted Answer

The net present value at Year 1 for the successful cash flows for Years 2-5 is: NPV₁ for Years 2-5 = $154,000[(1 - 1 / 1.16⁴)/ 0.16] = $430,919.82 NPV₀ = -$210,000 + 0.62[($79,000 + $430,919.82)/ 1.16] + 0.38(-$48,500 / 1.16)= $46,655.42

Roy Is Analyzing a 5-Year Project with an Initial Cost