fm13 4 - million. The decision tree would then look like...

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Answers and Solutions: 13 - 4 13-3 a. 0 1 2 20 ├─────┼─────┼────── ────┤ -300 40 40 40 NPV = -$19.0099 million. Don’t purchase. b. Wait 1 year: NPV @ 0 1 2 3 4 21 Yr. 0 | | | | | | 50% Prob. 0 -300 30 30 30 30 -$78.9889 | | | | | | 50% Prob. 0 -300 50 50 50 50 45.3430 If the cash flows are only $30 million per year, the NPV of the project is negative. However, we’ve not considered the fact that the company could then be sold for $280
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Unformatted text preview: million. The decision tree would then look like this: NPV @ 0 1 2 3 4 21 Yr. 0 | | | | | | 50% Prob. 0 -300 30 30 + 280 0 0 -$27.1468 | | | | | | 50% Prob. 0 -300 50 50 50 50 45.3430 The expected NPV of waiting 1 year is 0.5(-$27.1468) + 0.5($45.3430) = $9.0981 million. Given the option to sell, it makes sense to wait 1 year before deciding whether to make the acquisition. 13% r = 13% r = 13%...
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