Consider the following project data:
(1) A $500 feasibility study will be conducted at t = 0.
(2) If the study indicates potential, the firm will spend $1,000 at t = 1 to build a prototype. The best estimate now is that there is an 80 percent chance that the study will indicate potential, and a 20 percent chance that it will not.
(3) If reaction to the prototype is good, the firm will spend $10,000 to build a production plant at t = 2. The best estimate now is that there is a 60 percent chance that the reaction to the prototype will be good, and a 40 percent chance that it will be poor.
(4) If the plant is built, there is a 50 percent chance of a t = 3 cash inflow of $16,000 and a 50 percent chance of a $13,000 cash inflow.
PLEASE SHOW ALL WORK.
If the appropriate cost of capital is 10 percent, what is the project's expected NPV?
c. $ 0
e. $35© BrainMass Inc. brainmass.com July 16, 2018, 2:32 am ad1c9bdddf
Calculations for determining net present value are formatted in a table in the attached Excel file. The correct answer is $35.