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:

Third Party's Expertise

The specialized knowledge or skill possessed by an external individual or entity, which can influence or contribute to a situation or negotiation.

Procedural Nature

Describes the characteristic of being based on or adhering to established procedures or methods.

Process Consultants

Professionals who assist organizations or groups in understanding and improving their internal processes, especially concerning decision-making and problem-solving.

Final-Offer Arbitration

A dispute resolution process where each party presents their best offer, and an arbitrator chooses one of the offers with no alterations as the resolution.