Roy is analyzing a project and has determined that the initial cost will be $98,000 and the required rate of return needs to be 14 percent.The project has a 55 percent chance of success and a 45 percent chance of failure.If the project fails,it will generate an annual aftertax cash flow of $12,000.If the project succeeds,the annual aftertax cash flow will be $54,000.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 aftertax cash flow to $137,000 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:NPV_{1 for Years 2-5} = $137,000[(1 - 1/1.14⁴)/.14] = $399,178.59NPV₀ = -$98,000 + .55 × [($54,000 + 399,178.59)/1.14] + [.45 × ($12,000/1.14)] = $125,375.63

Roy Is Analyzing a Project and Has Determined That the Initial