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:

Primary

Referring to the first or main element of a system or device, such as the primary coil in a transformer.

Secondary

Refers to the coil or winding in a transformer that receives energy from the primary winding and delivers it to the load.

Hysteresis

The lag in response exhibited by a body when external forces are applied and removed, often observed in magnetic and mechanical systems.

Distribution Transformer

A common transformer used by utility companies to change their line voltage into the 240/120 volts necessary to operate homes and small businesses.