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What is the project's expected NPV?

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?

a. -$35

b. -$12

c. $ 0

d. $12

e. $35

Solution Summary

Calculations for determining net present value are formatted in a table in the attached Excel file. The correct answer is $35.

$2.19