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Expected NPV

1) Which of the following statements is most correct?
a. In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before making an investment.
b. In general, the greater the strategic advantages of being the first competitor to enter a given market, the more attractive it may be to wait before making an investment.
c. In general, the higher the discount rate, the more attractive it may be to wait before making an investment.
d. Statements b and c are correct.
e. All of the statements above are correct.

2) Marichal Motors is considering an investment in a proposed project. Rather than making the investment today, the company wants to wait a year to collect additional information about the project. If Marichal waits a year, it will not have to invest any cash flows unless it decides to make the investment. If it waits, there is a 25 percent chance the project?s expected NPV one year from today will be $10 million, a 50 percent chance that the project?s expected NPV one year from now will be $4 million, and a 25 percent chance that the project?s expected NPV one year from now will be -$10 million. All expected cash flows are discounted at 10 percent. What is the expected NPV (in today?s dollars) if the company chooses to wait a year before deciding whether to make the investment?
a. $2.9889 million
b. $3.1496 million
c. $3.6875 million
d. $4.0909 million
e. $4.5000 million

Solution Preview

1) Which of the following statements is most correct?
a. In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before
making an investment.
b. In general, the ...

Solution Summary

Expected NPV is studied.

$2.19