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Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to

Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter17: Long-term Investment Analysis
Section: Chapter Questions
Problem 6E
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Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $500,000. Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuilty beginning in year two. If the test marketing is not successful, Kinston can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two. Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. Kinston's cost of capital is 10%. Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to: A $90,000 OB $590,000 C$455,000 OD. $45,000
Transcribed Image Text:Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $500,000. Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuilty beginning in year two. If the test marketing is not successful, Kinston can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two. Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. Kinston's cost of capital is 10%. Q. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to: A $90,000 OB $590,000 C$455,000 OD. $45,000
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