Chrustuba Inc

question 36

Multiple Choice

Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 10.0%, what is the project's expected NPV (in thousands) after taking into account this growth option?

• A) $2,776
• B) $3,085
• C) $3,393
• D) $3,733
• E) $4,106

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Definitions:

Impairment

A decrease in the recoverable value of an asset below its carrying amount on the balance sheet, leading to an adjustment of the book value.

Bad Debt Expense

Represents the amount of receivables that a company does not expect to collect and is treated as an expense on the income statement.

Restructuring

The act of reorganizing the legal, ownership, operational, or other structures of a company to make it more profitable or better organized for its present needs.

Principal Amount

The initial size of a loan or bond or the amount of money invested, excluding any interest or profits.