Chrustuba Inc.is evaluating a new project that would cost $9 million at t = 0.There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million during Years 1,2,and 3.However,there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years.If the project is highly successful,it would open the door for another investment of $10 million at the end of Year 2,and this new investment could be sold for $20 million at the end of Year 3.Assuming a WACC of 10.0%,what is the project's expected NPV (in thousands)after taking into account this growth option?
A)$2,776
B)$3,085
C)$3,393
D)$3,733
E)

Question

Chrustuba Inc.is evaluating a new project that would cost $9 million at t = 0.There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million during Years 1,2,and 3.However,there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years.If the project is highly successful,it would open the door for another investment of $10 million at the end of Year 2,and this new investment could be sold for $20 million at the end of Year 3.Assuming a WACC of 10.0%,what is the project's expected NPV (in thousands)after taking into account this growth option? ​
A)$2,776
B)$3,085
C)$3,393
D)$3,733
E)​

Quizplus · Accepted Answer

The Answer of Chrustuba Inc.is evaluating a new project that would cost $9 million at t = 0.There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million during Years 1,2,and 3.However,there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years.If the project is highly successful,it would open the door for another investment of $10 million at the end of Year 2,and this new investment could be sold for $20 million at the end of Year 3.Assuming a WACC of 10.0%,what is the project's expected NPV (in thousands)after taking into account this growth option? ​
A)$2,776
B)$3,085
C)$3,393
D)$3,733
E)​