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Winters Corp

question 20

Multiple Choice

Winters Corp.is considering a new product that would require an investment of $22 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $11.0 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 10.0%.What is the value (in thousands) of the option to delay the project? Do not round intermediate calculations.
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Make informed decisions on whether to make or buy components based on relevant costs.

Determine the best product mix to maximize the use of a constrained resource.

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Make decisions on resource allocation based on contribution margin and constrained resources.

Definitions:

Behavioral

Related to or based on observable actions or responses in organisms, often studied in psychology and sociology.

Gestalt Psychology

A theory of mind and brain positing that the operational principle of the brain is holistic, parallel, and analog, with self-organizing tendencies; or, the idea that the whole is greater than the sum of its parts.

Cognitive

Relating to mental actions or processes involved in gaining knowledge and comprehension, including aspects such as awareness, perception, reasoning, and judgment.

Behavioral

Related to or involving actions and observable behaviors as a means to study psychological processes and disorders.