Norris Production Company (NPC)NPC Is Considering Whether to Make the Investment

question 33

Multiple Choice

Norris Production Company (NPC) NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t = 1 will remain at $2,500, the subsequent cash flows will remain at $750 per year if the competitor's product is rejected and $50 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7) This is a risky project, so a WACC of 16.0% is to be used. If NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars? (Hint: Find the NPV for "go now" and for "wait," then discount the wait-NPV back for one year since it will occur one year later, and then find the difference between the two NPVs.)

• A) $253.86
• B) $282.06
• C) $313.40
• D) $348.22
• E) $383.05

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