The dcf npv for a proposed project is negative at

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54. The DCF-NPV for a proposed project is negative at –$50,000. However, this project has a 50% chance of leading to an expansion opportunity that you believe will generate after-tax cash flows with a present value of $200,000. In today’s dollars, the costs of this future expansion opportunity would be $60,000. Does the growth option make investment now a positive NPV? a. Yes. Do the proposed project because the option generates $40,000. b. Yes. The NPV of the proposed project is $40,000. c. No. You would expect to lose $10,000. d. No. You would expect to lose $50,000. [ ANSWER: Our formula is: NPV = DCF-NPV + Value of option – Cost of option = –$50,000 + [(0.5)$200,000] – $60,000 = –$10,000 . So you will not take the proposed project. Although the future investment option is attractive and generates $40,000, this amount cannot overcome the negative DCF-NPV of –$50,000.] b 55. The DCF-NPV for a proposed project is positive at $50,000. However, this project has a 50% chance of leading to an expansion opportunity that you believe will generate after-tax cash flows with a present value of $200,000. The costs of this future expansion opportunity would be $60,000. What is the “real” NPV for this project? [ [(0.5)$200,000] – $60,000 = $90,000 .] d 56. The before-tax cash flows from your business are $300,000 per year, and your tax rate is 25% on this amount. Your required return is 12%. A developer offers to buy your land
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for which you will receive $840,000 on an after-tax basis. This is as much as you could get in twelve years when you plan on retiring. However, if you sell your land now, then you will have to give up your business. On an after-tax basis, the assets associated with your business could bring $75,000 if liquidated. If you stay in business, the after-tax annual EAC from the needed improvements would be $54,000. If you sell your business, you have a job offer for $80,000 per year on an after-tax basis until you retire in 12 years. You will abandon your business if you can make more money doing so. Should you abandon your business? [ would normally be, because you are selling, rather than undertaking, the project. We have: NPV = PV sale of land + PV assets liquidation + (EAC saved improvements )(PVAF 12%,12 ) – (Δ R – Δ E )(1 – T )(PVAF 12%,12 ) + Wages(1 – T)(PVAF 12%,12 ) – FV sale of land (PVF 12%,12 ) = $840,000 + $75,000 + $54,000(PVAF 12%,12 ) – $300,000(1 – 0.25)( PVAF 12%,12 ) + $80,000(PVAF 12%,12 ) – $840,000(PVF 12%,12 ) = $840,000 + $75,000 + $334,496 – $1,393,734 + $495,550 – $215,607 = $137,705 .] b
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