fm13 5 - d. Since the projects NPV with the tax is...

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Answers and Solutions: 13 - 5 13-4 a. 0 1 14 15 | | | | -6,200,000 600,000 600,000 600,000 Using a financial calculator, input the following data: CF 0 = -6,200,000; CF 1-15 = 600,000; I = 12; and then solve for NPV = -$2,113,481.31. b. 0 1 14 15 | | | | -6,200,000 1,200,000 1,200,000 1,200,000 Using a financial calculator, input the following data: CF 0 = -6,200,000; CF 1-15 = 1,200,000; I = 12; and then solve for NPV = $1,973,037.39. c. If they proceed with the project today, the project’s expected NPV = (0.5 × - $2,113,481.31) + (0.5 × $1,973,037.39) = -$70,221.96. So, Hart Enterprises would not do it.
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Unformatted text preview: d. Since the projects NPV with the tax is negative, if the tax were imposed the firm would abandon the project. Thus, the decision tree looks like this: NPV @ 0 1 2 15 Yr. 0 50% Prob. | | | | Taxes -6,200,000 6,000,000 0 0 -$ 842,857.14 No Taxes | | | | 50% Prob. -6,200,000 1,200,000 1,200,000 1,200,000 1,973,037.39 Expected NPV $ 565,090.13 Yes, the existence of the abandonment option changes the expected NPV of the project from negative to positive. Given this option the firm would take on the project because its expected NPV is $565,090.13. 12% 12% r= 12%...
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