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.

---

Definitions:

Water

A transparent, tasteless, odorless, and nearly colorless chemical substance which is the main constituent of Earth's hydrosphere, and the fluids of all known living organisms.

Mass Number

Of an isotope, the total number of protons and neutrons in the atomic nucleus.

Neutrons

Particles in an atom with no electrical charge, found in the nucleus alongside protons.

Protons

Positively charged subatomic particles found in the nucleus of an atom, contributing to the atomic number and mass.