Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $60,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is round intermediate calculations and round your answer to the nearest dollar.) Markung's Co. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be able to invest $6,000 in year 2 to generate an additional cash flow of $21,000 in year 3. If conditions are bad, the firm will not make any further investments in the project. Using the information from the preceding problem, the expected NPV of this project-when taking the growth option into account-is (Note: Do not round intermediate calculations and round your answer to the nearest dollar.) (Note: Do not Markung's Co.'s growth option is worth (Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $60,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is round intermediate calculations and round your answer to the nearest dollar.) Markung's Co. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be able to invest $6,000 in year 2 to generate an additional cash flow of $21,000 in year 3. If conditions are bad, the firm will not make any further investments in the project. Using the information from the preceding problem, the expected NPV of this project-when taking the growth option into account-is (Note: Do not round intermediate calculations and round your answer to the nearest dollar.) (Note: Do not Markung's Co.'s growth option is worth (Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 5P
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Transcribed Image Text:Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value
of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options.
Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual
cash flows for the project under good conditions will be $60,000 and $11,000 under bad conditions. The firm believes that there is a
60% chance of good conditions and a 40% chance of bad conditions.
If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is
round intermediate calculations and round your answer to the nearest dollar.)
.
Markung's Co. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be
able to invest $6,000 in year 2 to generate an additional cash flow of $21,000 in year 3. If conditions are bad, the firm will not make any further
investments in the project.
Using the information from the preceding problem, the expected NPV of this project-when taking the growth option into account-is
(Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
Markung's Co.'s growth option is worth
(Note: Do not
(Note: Do not round intermediate calculations and round your answer to the nearest dollar.)
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