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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:

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Definitions:

Bonuses

Bonuses are financial incentives or rewards given to employees or members of an organization, typically based on performance or achieving certain targets.

Payday Loan

A brief-duration loan with high interest rates, usually payable by the borrower on their upcoming payday.

Compensation

The total amount of the various salaries, wages, bonuses, benefits, and other forms of payment given to employees for their work.

Profitable Stores

Retail or commercial outlets that generate more revenue than the operating and other costs, thereby yielding profit.