TutorCom Is Considering a Plan to Develop an Online Finance

question 9

Multiple Choice

Tutor.com is considering a plan to develop an online finance tutoring package that has the cost and revenue projections shown below. One of Tutor's larger competitors, Online Professor (OP) , is expected to do one of two things in Year 5: (1) develop its own competing program, which will put Tutor's program out of business, or (2) offer to buy Tutor's program if it decides that this would be less expensive than developing its own program. Tutor thinks there is a 35% probability that its program will be purchased for $6 million and a 65% probability that it won't be bought, and thus the program will simply be closed down with no salvage value. What is the estimated net present value of the project (in thousands) at a WACC = 10%, giving consideration to the potential future purchase?

• A) $161.46
• B) $179.40
• C) $199.33
• D) $219.26
• E) $241.19

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Definitions:

NCI

Stands for Non-Controlling Interest, which is a portion of a subsidiary not owned by the parent company, yet reflected in the consolidated financial statements.

Share Capital

The amount of money a company has raised by issuing shares to shareholders.

Bargain Purchase

A transaction in which a buyer acquires assets, or occasionally a business, for a price considered to be significantly lower than the fair market value.

Intragroup Services

Services rendered by one entity within a larger corporate group to another entity within the same group.