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25) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years

ID: 2654747 • Letter: 2

Question

25) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years, and a 25% chance of returning $25 for 7-years. Based on the above data, what is the project's net present value?

Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?

-$1,312,456

-$1,104,607

-$875,203

$105,999

e) $321,788

26) The firm has a 75% chance if it invests -$1,500 a return of $500 for 7-years, and a 25% chance of returning $25 for 7-years.
Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?

a) $77.23

b) $85.81

$95.34

d) $105.94

e) $116.53

a)

-$1,312,456

b)

-$1,104,607

c)

-$875,203

d)

$105,999

e) $321,788

Explanation / Answer

Initial investment 1500 1500 Pv factor for 7 years 1/1.1^1+….1/1.1^7 4.86 Return of $500 =500*4.86 2430 Return of $25 =25*4.86 121.5 Total NPV =(2430*0.75+121.5*0.25)-1500 352.875

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