Winters Corp

question 38

Multiple Choice

Winters Corp.is considering a new product that would require an investment of $20 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $10 million at the end of each of the next 3 years (t = 1,2,3) ,but if the market did not like the product,then the cash flows would be only $4 million per year.There is a 50% probability that the market will be good.The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak,but it would have to incur costs to obtain this timing option.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.The project's WACC is 11.0%.What is the value (in thousands) of the option to delay the project? ​

• A)$1,311
• B)$1,457
• C)$1,619
• D)$1,799
• E)$1,999

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Definitions:

Total Cost

The complete cost of production, including both fixed and variable costs.

Barrier To Entry

Factors that prevent or hinder companies from entering a specific market or industry.

Invention And Innovation

Invention refers to the creation of new ideas, goods, or services, while innovation involves improving or implementing new ideas into existing products or processes.

Demand Schedule

A table that lists the quantity of a good or service that consumers are willing and able to purchase at various prices.