martin develpoment co is deciding whether to proceed with project x. the cost wo

Question

martin develpoment co is deciding whether to proceed with project x. the cost would be $9 million in year 0. there is a 50 % chance that x would be hugely successful and would generate annual after tax cash flows of $6 million per year during year 1,2, and 3. however, there is a 50% chance that x would be less successful and would generate only $1 million per year for 3 years.if project x is hugely successful, it would open the door to another investment, project y, which would require an outlay of $10 million at the end of year 2. project y would then be sold to another company at a price of $20 million at the nd of year 3. martin's wacc is 11%

a. if the company does not consider real options , what is project x's npv?

b. what is x's npv considering the growth option?

c.how valuable is the growth option?

Explanation / Answer

This isn't a simple NPV problem. It's kind of a mix between NPV and expected value. It would take too long for me to solve (I charge $ for anything over 2 mins), but for X you'll want to calculate the expected value of each cashflow (given the 50% chance it will do well and the 50% it won't), and then plug that in for the Cash Flows. Your Discount Rate is 11%. Y is a much easier calculation that you should know how to get if you were assigned X. I was a finance and accounting major and we definitely didn't have to calculate stuff like this until the upper division classes... so I'm hoping you're a finance student! tke help

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.