A firm is considering investing $10 million today to start a new product line. The future of

Question:

A firm is considering investing $10 million today to start a new product line. The future of the project is unclear however and depends on the state of the economy. The project will last 5 years. The yearly cash flows for the project are shown below for the different states of economy. What is the expected NPV for the project if the cost of capital is 12%?

Project outcome _________Chance of outcome _________Yearly cash flow

Good ....................................... 25% .................................. $8.00

Average .................................... 50% .................................. $3.00

Bad ......................................... 25% ................................. ($2.00)

a. -$2.23 million

b. -$1.15million

c.-$0.75 million

d. $0.81 million

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...