Use the Information for the Question(s)below

question 36

Multiple Choice

Use the information for the question(s) below.
Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%.
-Assuming that Kinston does not have the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:

• A)-$45,000.
• B)$455,000.
• C)$590,000.
• D)$90,000.

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Definitions:

Person-Situation Debate

A controversy in psychology concerning whether an individual's behavior is more influenced by personality traits or by situational factors.

Funder's Analysis

An approach or method in psychological study that emphasizes the importance of accurate personality judgment and the conditions under which it can be achieved.

Predict

To declare or indicate in advance based on observation, experience, or scientific reasoning, especially about future occurrences or trends.

Perceptions

The process of interpreting sensory information to form an understanding of the environment around us, influenced by experience, beliefs, and behavior.