William's Co.is considering spending $29,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $64,000 at Time 1 to start production.If the product is introduced and it is successful,it will produce after-tax cash flows of $48,000 a year for Years 2 through 4.If it is unsuccessful,there will be no cash flow in Year 1,after which the project will be terminated.There are no recovery costs at the end of Year 4.The probability of a successful test and investment is 58 percent.What is the net present value at Time 0 given a discount rate of 16 percent?

Question

Quizplus · Accepted Answer

NPV₁ = -$64,000 + $48,000{[(1 - 1 / 1.16³)] / 0.16} = $43,802.70 NPV₀ = -$29,000 + 0.58($43,802.70 / 1.16)+ (0.42 × $0)= -$7,098.65