Use the Information for the Question(s)below

question 19

Multiple Choice

Use the information for the question(s) below.
Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%.
-Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

• A)$0.
• B)$90,000.
• C)-$45,000.
• D)$1,000,000.

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Definitions:

Parallel

Entities or processes that are happening simultaneously without intersecting or affecting each other directly.

Variables

Elements, features, or factors that can be changed and measured in an experiment to determine their effects.

Main Effect

In analysis of variance, when a factor or an independent variable has a significant effect upon the outcome variable.

ANOVA

Short for Analysis of Variance, a set of statistical techniques used to compare the means of three or more samples.