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Net present value

Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is \$225 million. If the test is successful, which is expected to be 65%, the company will spend another \$800 million to put the productive capabilities in place. The expected cash flows after tax for a successful project are \$225 million each year for the next six years with a probability of .8; there is a 20% chance of a zero NPV. If the tests were to fail, the cash flows associated with continuing in years 2 - 7 would be \$125 million per year after tax. The company uses a 12% discount rate for these types of projects. Determine the net present value if the tests are a success. Draw a decision tree and calculate the net present value of the project.

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Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is \$225 ...

Solution Summary

This provides the steps to prepare the decision tree and calculate the net present value

\$2.19