Use the Information for the Question(s)below

question 19

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%.
-Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

• A)$0.
• B)$90,000.
• C)-$45,000.
• D)$1,000,000.

---

Definitions:

Puberty

The developmental period in which adolescents reach sexual maturity and become capable of reproduction.

Lead Poisoning

A medical condition caused by elevated levels of lead in the body, leading to neurological, gastrointestinal, and hematological health issues.

Analysis

The process of examining components or structures in detail to understand their nature or to determine something.

Subcutaneous Layer

The innermost layer of skin composed of fat and connective tissue, which provides insulation and cushioning for the body.