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Category > Business & Finance Posted 29 May 2017 My Price 8.00

Martin Development Co. is deciding whether to proceed with Project X

Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $6 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $10 million at the end of Year 2. Project Y would then be sold to another company at a price of $20 million at the end of Year 3. Martin's WACC is 11%.

A. If the Company does not consider real options, what is Project X's NPV?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

B. What is X's NPV considering the growth option?

 

 

C. How valuable is the growth option?

Answers

Alpha Geek
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Status NEW Posted 29 May 2017 10:05 AM My Price 8.00

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file 1496052673-Answer.docx preview (266 words )
M-----------art-----------in -----------Dev-----------elo-----------pme-----------nt -----------Co.----------- is----------- de-----------cid-----------ing----------- wh-----------eth-----------er -----------to -----------pro-----------cee-----------d w-----------ith----------- Pr-----------oje-----------ct -----------X. -----------The----------- co-----------st -----------wou-----------ld -----------be -----------$9 -----------mil-----------lio-----------n i-----------n Y-----------ear----------- 0.----------- Th-----------ere----------- is----------- a -----------50%----------- ch-----------anc-----------e t-----------hat----------- X -----------wou-----------ld -----------be -----------hug-----------ely----------- su-----------cce-----------ssf-----------ul -----------and----------- wo-----------uld----------- ge-----------ner-----------ate----------- an-----------nua-----------l a-----------fte-----------r-t-----------ax -----------cas-----------h f-----------low-----------s o-----------f $-----------6 m-----------ill-----------ion----------- pe-----------r y-----------ear----------- du-----------rin-----------g Y-----------ear-----------s 1-----------, 2-----------, a-----------nd -----------3. -----------How-----------eve-----------r, -----------the-----------re -----------is -----------a 5-----------0% -----------cha-----------nce----------- th-----------at -----------X w-----------oul-----------d b-----------e l-----------ess----------- su-----------cce-----------ssf-----------ul -----------and----------- wo-----------uld----------- ge-----------ner-----------ate----------- on-----------ly -----------$1 -----------mil-----------lio-----------n p-----------er -----------yea-----------r f-----------or -----------the----------- 3 -----------yea-----------rs.----------- If----------- Pr-----------oje-----------ct -----------X i-----------s h-----------uge-----------ly -----------suc-----------ces-----------sfu-----------l, -----------it -----------wou-----------ld
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