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Multiple-choice: decision tree analysis and capital expenditure project

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

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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 ...

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$2.19