hack wellington co is considering a three year project that will require an init
ID: 2710379 • Letter: H
Question
hack wellington co is considering a three year project that will require an initial investment of $55000. it has estimated that the annual cash flows for the project under good conditions will be $80000 and $11000 under bad conditions. the firm believes that there is a 60% chance of good conditions and 40% chance of bad conditions.
If the firm is using a WACC of 13%, the expected NPV of the project is________. A. $65,288 B.$37,798 C.$48,107 D.$68,724
Hack Wellington Co. wants to take a potential growth option into account when calculating the projects expected NPV. If conditions are good, the firm will be able to invest $5,000 in year 2 to generate an addition cash flow of $18,000 in year 3. if conditions are bad, the firm will not make any further investments in the project.
Using the information from the preceding problem, the expected NPV of this project - when taking the growth option into account - is______. A.$81,246 B. $73,860 C. $77,553 D.$84,939
Hack Wellington Co.'s growth option is worth______. A.$4,622 B. $5,136 C. $5,650 D. $4,109 E. $5,393.
Explanation / Answer
Ans
Ans 1 Initial Investment of Project (A) -55,000.00 Expected cash flow per Annum for 3 Years 52,400.00 PVAF @ 13% for 3 Years 2.36 PV of Cash inflows (B) 1,23,724.40 NPV 68,724.40 Ans 2 Increase in cash inflow on account of Growth option Cash outflow 5,000.00 DF @ 13 -0.78 Present value of cash outflow -3,915.73 Cash inflow 18,000.00 DF @ 13 0.69 Present value of cash inflow 12,474.90 Probabibility of growth option 0.60 Increase in NPV on account of Growth option 73,859.90 Ans 3 Worth of Growth Option= NPV with Growth option-NPV without growth option 5,135.50Related Questions
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