Your Company Has a New Project to Be Considered

question 25

Essay

Your company has a new project to be considered. You are given the following information on the best guess of related outcomes for the project. The cost of developing and market testing the product over the next year is $225 million. If the test is successful, which is expected to be 65%, the company will spend another $800 million to put the productive capabilities in place. The expected cashflows after tax for a successful project are $225 million each year for the next six years with a probability of.8; there is a 20% chance of a zero NPV. If the tests fail the cashflows associated with continuing through the sixth year is $125 million per year after tax. The company uses a 12% discount rate for these types of projects. Determine the net present value if the tests are a success. Determine the net present value and the decision to undertake testing or not.
A._12,6] = .65{[-800 + (225)4.1114].8 + .2(0)} = .65(100.52) = 65.34
NPV₀ = -225 + 65.34/1.12 = -166.66; Do not invest.

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