Martin Development Co. is deciding whether to proceed with Project X. The cost w

Question

Martin Development 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 Years 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 the 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 end of Year 3. Martin

Explanation / Answer

A)

To calculate the NPV here, what you do is calculate the NPV based on the first scenario, and then calculate the NPV based on the second scenario (Less successful scenario). Once the NPV

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