Use this information for this and the next 2 questions. HCB, Inc. is considering investing in a new 'We're # 1' foam hand cutting facility. If UT has a successful year, then demand will be high and cash flows will be $100,000 per year for 3 years starting in Year 1. If UT has a bad year, then demand will be low and cash flows will be $30,000 per year for 3 years starting in Year 1. The probability of UT having a good year and demand being high is 60% and the probability of a bad year and low demand is 40%. It will cost $150,000 to purchase the equipment. HCB's WACC is 10%. Calculate the expected NPV of this project.$26,412$29,053 ***correct answer$31,959$35,155$38,670If HCB waits a year to invest, it will know which demand scenario is going to occur and therefore which cash flows will occur. These cash flows will occur in Years 2, 3, and 4. HCB will only invest in Year 1 if it is optimal to do so. Use a decision tree to find the expected NPV of the project, which is an investment timing option. Note, the investment amount is known with certainty and is therefore discounted at the risk-free rate of 6%.$50,741 *** correct answer$55,815$61,396$67,536$74,290

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Answered: Use this information for this and the…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

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Use this information for this and the next 2 questions. HCB, Inc. is considering investing in a new 'We're # 1' foam hand cutting facility. If UT has a successful year, then demand will be high and cash flows will be $100,000 per year for 3 years starting in Year 1. If UT has a bad year, then demand will be low and cash flows will be $30,000 per year for 3 years starting in Year 1. The probability of UT having a good year and demand being high is 60% and the probability of a bad year and low demand is 40%. It will cost $150,000 to purchase the equipment. HCB's WACC is 10%. Calculate the expected NPV of this project.
$26,412
$29,053 ***correct answer
$31,959
$35,155
$38,670

If HCB waits a year to invest, it will know which demand scenario is going to occur and therefore which cash flows will occur. These cash flows will occur in Years 2, 3, and 4. HCB will only invest in Year 1 if it is optimal to do so. Use a decision tree to find the expected NPV of the project, which is an investment timing option. Note, the investment amount is known with certainty and is therefore discounted at the risk-free rate of 6%.

$50,741 *** correct answer
$55,815
$61,396
$67,536
$74,290

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