Use the Information for the Question(s)below

question 29

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

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Definitions:

Mere Exposure Effect

A mental effect in which individuals naturally favor things simply because they recognize them.

Novelty Wear-Out Effect

A phenomenon where the effectiveness or appeal of something new diminishes over time as it becomes familiar or overused.

Barrier-To-Entry Effect

Factors that prevent or hinder new competitors from easily entering an industry or area of business.

Preference Consistency Effect

A phenomenon where individuals show a tendency to remain consistent with their previously stated preferences and choices over time.