fm13 2 - Expected NPV = .5(-4.027) + .5(5.920) = 0.947 Note...

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Answers and Solutions: 13 - 2 SOLUTIONS TO END-OF-CHAPTER PROBLEMS 13-1 a. 0 1 2 20 ├─────┼─────┼────── ────┤ -20 3 3 3 NPV = $1.074 million. b. Wait 1 year: PV @ 0 1 2 3 21 Yr. 1 Tax imposed | | | | | 50% Prob . 0 -20 2.2 2.2 2.2 15.45 Tax not imposed | | | | | 50% Prob. 0 -20 3.8 3.8 3.8 26.69 Tax imposed: NPV @ Yr. 1 = (-20 + 15.45)/(1.13) = -4.027 Tax not imposed: NPV @ Yr 1 = (-20 + 26.69)/ (1.13) = 5.920
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Unformatted text preview: Expected NPV = .5(-4.027) + .5(5.920) = 0.947 Note though, that if the tax is imposed, the NPV of the project is negative and therefore would not be undertaken. The value of this option of waiting one year is evaluated as 0.5($0) + (0.5)($ 5.920) = $2.96 million. Since the NPV of waiting one year is greater than going ahead and proceeding with the project today, it makes sense to wait. r= 13%...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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