Exhibit 14.4
The Z−90 project being considered by Steppingstone Inc. (SI) has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, Z−45, becomes an industry standard. There is a 50% chance that the Z−45 will become the industry standard, in which case the Z−90's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the Z−45 will not become the industry standard, in which case the Z−90's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.

-Refer to Exhibit 14.4.Based on the above information,what is the Z−90's expected net present value?
A)−$6,678
B)−$3,251
C)$15,303
D)$20,004
E)$45,965

Question

Exhibit 14.4
The Z−90 project being considered by Steppingstone Inc. (SI) has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, Z−45, becomes an industry standard. There is a 50% chance that the Z−45 will become the industry standard, in which case the Z−90's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the Z−45 will not become the industry standard, in which case the Z−90's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.

-Refer to Exhibit 14.4.Based on the above information,what is the Z−90's expected net present value?
A)−$6,678
B)−$3,251
C)$15,303
D)$20,004
E)$45,965

Quizplus · Accepted Answer

Step 1:Find the project's expected cash flows in Years 1 through 5: (0.5)($110,000) + (0.5)($25,000) = $67,500. Step 2:Find the project's NPV by entering the following data inputs in the financial calculator: CF₀ = −250,000; CF₁₋₅ = 67,500; I/YR = 12; and then solve for NPV = −$6,678.

Exhibit 14.4 The Z−90 Project Being Considered by Steppingstone Inc. (SI) Has