William's Co.is considering spending $15,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $58,000 at Time 1 to start production of the product.If the product is introduced and it is successful,it will produce aftertax cash flows of $45,000 a year for Years 2 through 4.The probability of successful test and investment is 62 percent.What is the net present value at Time 0 given a 14 percent discount rate?

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Quizplus · Accepted Answer

NPV₁ = -$58,000 + $45,000 {[(1 - 1/1.14³)]/.14} = $46,473.44NPV₀ = -$15,000 + .62 × ($46,473.44/1.14)+ (.38 × $0)= $10,275.03