The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the “winged” keels first introduced on the 12-meter yachts that raced for the America’s Cup.

First, YYC would have to invest $5,000 at t = 0 for the design and model tank testing of the new boat. YYC’s managers believe there is a 70% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value.

The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost $400,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for $100,000. The managers estimate the probability is 75% that the boats will pass testing and that Stage 3 will be undertaken.

Stage 3 consists of converting an unused production line to produce the new design. This would cost $1 million at t = 2. If the economy is strong at this point, the net value of sales would be $4 million; if the economy is weak, the net value would be $2.5 million. Both net values occur at t = 3, and each state of the economy has a probability of 0.5. YYC’s corporate cost of capital is 12%.

Assume this project has average risk. What is the NPV of the scenario that goes from the start and ends with YYC going through with the new sailboat and facing strong economy in the end?

		$1,095,000
		$620,114
		$117,779
		($185,952)
		($5,000)

Assume this project has average risk. What is the joint probability of the scenario that goes from the start and ends with YYC going through with the new sailboat and facing strong economy in the end?

		0.5000
		0.2625
		0.3000
		0.2400
		0.7500

Answer rating: 100% (QA)

Solution Part 1 The cash flows for the scenario that goes from the start and ends with YYC going thr... View the full answer