The Celeste Corporation is bringing a new product to market. It will require an

Question

The Celeste Corporation is bringing a new product to market.  It will require an investment of $100,000 today.  The firm expects to sell 1,000 units per year at $12 each, forever.  The relevant discount rate is 10%.

            NPV is:

Demand for this product is uncertain, and the uncertainty will be resolved at the end of the first year.  If demand is high, the firm expects to sell 1,500 units per year; if demand is low, 500 units per year will be sold (in either case, the price will be $12).  The high and low demand outcomes each have a probability of 50%.  At any time after the first year, the firm can sell the technology for $80,000.

            NPV is:

Explanation / Answer

1.

NPV = -100000+12000/.1 = $20000

2.

NPV = -100000+(12000/1.1)+(.5*1500*12/(.1*1.1))+(.5*500*12/(.1*1.1))= 20000

80000/1.1 = $72727.27

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