Explore BrainMass
Share

Explore BrainMass

    Multiple-choice: decision tree analysis and capital expenditure project

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $12M calculated over a five-year life. This best case path has an overall probability of occurring of 20%. A real option is available at an initial cost of $800,000 which will add a single $6M cash inflow to this best case path at its end. The option doesn't have a significant effect on the project's risk. What is the option's value? The company's cost of capital is 12%.

    a. ($3,404)
    b. $2,604,000
    c. ($119,000)
    d. $274,000

    Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000. The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.
    a. $32,000
    b. $27,000
    c. $24,000
    d. none of the above

    (Complete problem found in attachment)

    © BrainMass Inc. brainmass.com October 9, 2019, 4:59 pm ad1c9bdddf
    https://brainmass.com/business/finance/multiple-choice-decision-tree-analysis-and-capital-expenditure-project-45198

    Solution Preview

    PLEASE, PROVIDE AN ACCOMPANYING SOLUTION. THANK YOU!

    Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $12M calculated over a five-year life. This best case path has an overall probability of occurring of 20%. A real option is available at an initial cost of $800,000 which will add a single $6M cash inflow to this best case path at its end. The ...

    Solution Summary

    You will find the answer to this puzzling assignment inside...

    $2.19