Reading Inc

question 83

Essay

Reading Inc. is contemplating a project represented by the following decision tree. ($000). Reading is a small firm that is likely to be ruined by a project that loses more than $1.0 million. The firm's cost of capital is 14%. Calculate the project's expected NPV and make a recommendation regarding acceptance.
($000):

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Definitions:

Average Costs

The total costs (fixed and variable) divided by the total output, indicating the cost per unit of output produced.

Decreasing Returns to Scale

A situation in which, when the scale of production is increased, the output increases at a proportionally lower rate.

Minimum Efficient Scale

The smallest level of production a company can achieve while still taking full advantage of economies of scale in terms of costs per unit.

Long-Run Average Cost Curve

A graphical representation showing the lowest average cost of producing any output level when all inputs can be varied.