Purchase Solution

Multiple-choice: decision tree analysis and capital expenditure project

Not what you're looking for?

Ask Custom Question

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)

Purchase this Solution

Solution Summary

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

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 ...

Purchase this Solution


Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Lean your Process

This quiz will help you understand the basic concepts of Lean.