A research and development manager associates a probability of success of 65% wi

Question

A research and development manager associates a probability of success of 65% with a research investment at time zero being successful and generating the need for an additional $300,000 development investment at the end of year one which is estimated to have a probability of 85% of successfully generating profits of $220,000 per year for year two through 10, assuming a washout of escalation of operation costs and sales revenue. If failure occurs after the time zero research investment a reclamation cost of $100,000 will be realized at the end of year one. If failure occurs after the year one investment, the salvage value will be $250,000 at the end of year two for equipment salvage. Using a before-tax expected ROR of 23% in this investment, what is the risk free project NPV valuation?

A) 391,067
B) 371,983
C) 413,053
D) 354,885

Explanation / Answer

A) 267898

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