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# fm13 7 - is 79,247 The NPV of the top row is 79,247 –...

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Answers and Solutions: 13 - 7 13-5 a. 0 1 2 40% Prob . | | | Good -20,000 25,000 25,000 NPV = 23,388 Bad | | | 60% Prob. -20,000 5,000 5,000 NPV = -11,322 ENPV = 23,388 (0.40) – 11,322 (0.60) = \$2,562 b. 0 1 2 3 4 40% Prob . | | | | | Good -20,000 25,000 25,000 25,000 25,000 -20,000 (r = 6%) Bad | | | | | 60% Prob. -20,000 5,000 5,000 0 0 The PV of the 20,000 payment in year 2 at the risk free rate is 20,000/(1.06) 2 = 17,800. The PV of the 4 cash flows of 25,000 in years 1 through 4 at the cost of capital of 10%
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Unformatted text preview: is 79,247. The NPV of the top row is 79,247 – 20,000 – 17,800 = 41,447. The NPV of the bottom row is still -11,332, as it was in part a. The ENPV is 41,447 (0.40) -11,332 (0.60) = \$9,786. ENPV = 23,388 (0.40) – 11,322 (0.60) = \$2,562. This is the ENPV of the project including the growth option. The value of the growth option itself is the difference: Value of growth option = 9,786 – 2,562 = 7,224. r = 10% r = 10%...
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