OklahomaOklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.
-Refer to Scenario: Oklahoma.Based on the above information,what is the F-200's expected net present value?
A)-$6,678
B)-$3,251
C)$15,303
D)$20,004

Question

Quizplus · Accepted Answer

To calculate the expected net present value (NPV) of project F-200, we first need to calculate the NPV for each scenario (F-100 becoming an industry standard and not becoming an industry standard) and then take the average. For the scenario where F-100 becomes an industry standard, the cash flows are $110,000 for 5 years. Using a discount rate of 12%, the NPV can be calculated using the formula for the present value of an annuity. The NPV for this scenario is approximately $396,321. Subtracting the initial investment of $250,000 gives us $146,321.For the scenario where F-100 does not become an industry standard, the cash flows are $25,000 for 5 years. Using the same discount rate, the NPV for this scenario is approximately $89,644. Subtracting the initial investment of $250,000 gives us -$160,356.The expected NPV is the average of these two scenarios, weighted by their probabilities (50% each):$$ \text{Expected NPV} = 0.5 \times 146,321 + 0.5 \times (-160,356) = -6,678 $$Therefore, the expected NPV of project F-200 is -$6,678.

OklahomaOklahoma Instruments (OI) Is Considering a Project Called F-200 That