A Start-Up Company Is Making a Decision on Whether to Develop

question 10

Multiple Choice

A start-up company is making a decision on whether to develop a new internet social networking site. The site will cost $1 million to develop, but it is unclear whether the new technology critical to the site will work correctly. If development is successful, it will cost an additional $20 million next year to advertise the site to Internet users. If the site becomes popular with Internet users, it is expected to generate a present value of $100 million in advertising revenue. There is a 10 per cent chance that the site will be successfully developed and subsequently become popular with Internet users. The company's cost of capital is 15 per cent. Should the company pursue the project?

• A) No, the project has a negative NPV.
• B) Yes, the project has a positive NPV.
• C) It doesn't matter. The project has zero NPV.
• D) There is not enough information to make a decision.

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Definitions:

Somatic Cell

Any cell of a living organism other than the reproductive cells, forming the body of the organism.

Metaphase

Time during cell division when the chromosomes line up along the equator of the cell.

Genotypes

The genetic makeup of an organism, representing the underlying codes for traits, which interacts with the environment to determine the organism's phenotype.

Heterozygous

Describes an organism that carries two different alleles of a particular gene, one inherited from each parent.