Chrustuba Inc

question 6

Multiple Choice

Chrustuba Inc.is evaluating a new project that would cost $8.6 million at t = 0.There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $5.6 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 $11 million at the end of Year 2,and this new investment could be sold for $22 million at the end of Year 3.Assuming a WACC of 9.5%,what is the project's expected NPV (in thousands) after taking into account this growth option? Do not round intermediate calculations.
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• A) 0$3,123
• B) 0$3,471
• C) 0$4,165
• D) 0$2,603
• E) 0$2,950

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Definitions:

Service Placement

The process of designing and implementing the delivery of services to meet customer needs effectively and efficiently.

Straight-Line Method

A technique for computing depreciation that involves uniformly distributing an asset's cost throughout its lifespan.

Salvage Value

The anticipated concluding value of an asset at the expiration of its operational period.

Commercial Substance

A concept in accounting that a transaction has commercial substance if it significantly changes the economic position or cash flows of the company.