companies often need to choose between making an investment now or waiting till the company can gather more relevant information about the potential project. this opportunity to wait before making the decision is called the investment timing option. tolbotics inc. is considering a three-year project that will require an initial investment of $44,000. if market demand is strong, tolbotics inc. thinks that the project will generate cash flows of $29,500 per year. however, if market demand is weak, the company believes that the project will generate cash flows of only $1,500 per year. the company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. if the company uses a project cost of capital of 14%, what will be the expected net present value (npv) of this project? -$7,614 -$7,214 -$9,618 -$8,015

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04-11-2022
Business

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companies often need to choose between making an investment now or waiting till the company can gather more relevant information about the potential project. this opportunity to wait before making the decision is called the investment timing option. tolbotics inc. is considering a three-year project that will require an initial investment of $44,000. if market demand is strong, tolbotics inc. thinks that the project will generate cash flows of $29,500 per year. however, if market demand is weak, the company believes that the project will generate cash flows of only $1,500 per year. the company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. if the company uses a project cost of capital of 14%, what will be the expected net present value (npv) of this project? -$7,614 -$7,214 -$9,618 -$8,015

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rafikiedu03 rafikiedu03 · Answer 1 · 2022-11-09T00:52:25-05:00

Expected Annual Cash Flows = 50% x 28,500 + 50% x 1,000 = $14,750

NPV = -43,500 + 14,750 / (1 + 12%) + 14,750 / (1 + 12%)^2 + 14,750 / (1 + 12%)^3

= - $8,073

If you delay the project

NPV in year 1 = -43,500 + 28,500 / 1.12 + 28,500 / 1.12^2 = $4,666

Expected NPV today = 50% x 4,666 / 1.12 = $2,083 as there is only 50% probability of success.

Value of option to delay = 2,083 + 8,073 = $10,156

Possibility is the department of mathematics regarding numerical descriptions of how probable an event is to occur, or how likely it's far that a proposition is actual. The possibility of an occasion is quite a number among zero and 1, in which, more or less speakme, 0 indicates the impossibility of the event and 1 indicates truth. The better the chance of an occasion, the more likely it is that the occasion will occur. A simple example is the tossing of a truthful (independent) coin. For the reason that coin is honest, the two effects ("heads" and "tails") are each similarly probably; the opportunity of "heads" equals the chance of "tails"; and seeing that no different outcomes are viable, the probability of both "heads" or "tails" is half of (that can also be written as zero.Five or 50%). Those standards have been given an axiomatic mathematical formalization in opportunity concept, that is used broadly in regions of examine including facts, mathematics, science, finance, playing, artificial intelligence, system studying, pc technological know-how, game idea, and philosophy to, for instance, draw inferences about the predicted frequency of activities. Probability theory is likewise used to explain the underlying mechanics and regularities of complex systems.

Learn more about probability here

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