Steppingstone Incorporated The Z−90 Project Being Considered by Steppingstone Incorporated (SI) Has

question 19

Multiple Choice

Steppingstone Incorporated
The Z−90 project being considered by Steppingstone Incorporated (SI) has an up-front cost of $250,000.The project's subsequent cash flows are critically dependent on whether another of its products, Z−45, becomes an industry standard.There is a 50% chance that the Z−45 will become the industry standard, in which case the Z−90's expected cash flows will be $110,000 at the end of each of the next 5 years.There is a 50% chance that the Z−45 will not become the industry standard, in which case the Z−90's expected cash flows will be $25,000 at the end of each of the next 5 years.Assume that the cost of capital is 12%.
-Refer to data for Steppingstone Incorporated.Based on the above information, what is the Z−90's expected net present value?

• A) −$6,678
• B) −$3,251
• C) $15,303
• D) $20,004
• E) $45,965

---

Definitions:

Cost of Capital

The minimum return that a business needs to generate on its projects to preserve its marketplace value and draw in financing.

Flotation Costs

Expenses incurred by a company in issuing new stocks or bonds, including underwriting, legal, and registration fees.

Tax Rate

The rate at which taxes are imposed on the income of a person or business.

Expected Growth Approach

A method for estimating a company's future growth by analyzing historical data, trends, and external market factors.