2. Zydeco Enterprises is considering undertaking a special project requiring an initial outlay of $90,000. The...

 

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2. Zydeco Enterprises is considering undertaking a special project requiring an initial outlay of $90,000. The project would have a two-year life, after which there will be no expected salvage or terminal value. The appropriate discount rate is assumed to be 8%. The possible incremental after-tax cash flows and associated probabilities of occurrence are as follows: Year 0 Year 1 Year 2 Possible Initial Conditional Cash flow Probability Cash flow NPV scenarios investment probability 1 20,000 0.3 ? 2 60,000 0.3- -30,000 0.5 -8724.28 3 40,000 0.2 -150.892 -90,000 4 60,000 0.2 35514.4 5 80,000 0.74 70,000 0.5 44087.79 6 80,000 0.3 52661.18 (1) Calculate the NPV of the project in the possible scenario 1. (2pts) (2) Calculate the expected net present value (NPV) of this project. (3pts) 8 / 15 (3) Suppose that the possibility of abandonment exists and that the abandonment value of the project at the end of the first year is $45,000 after-tax. Calculate the new expected net present value of the project, assuming that the company would abandon the project if it is worthwhile to do so. (5pts) (4) What is the value of the managerial option? (2pts) 2. Zydeco Enterprises is considering undertaking a special project requiring an initial outlay of $90,000. The project would have a two-year life, after which there will be no expected salvage or terminal value. The appropriate discount rate is assumed to be 8%. The possible incremental after-tax cash flows and associated probabilities of occurrence are as follows: Year 0 Year 1 Year 2 Possible Initial Conditional Cash flow Probability Cash flow NPV scenarios investment probability 1 20,000 0.3 ? 2 60,000 0.3- -30,000 0.5 -8724.28 3 40,000 0.2 -150.892 -90,000 4 60,000 0.2 35514.4 5 80,000 0.74 70,000 0.5 44087.79 6 80,000 0.3 52661.18 (1) Calculate the NPV of the project in the possible scenario 1. (2pts) (2) Calculate the expected net present value (NPV) of this project. (3pts) 8 / 15 (3) Suppose that the possibility of abandonment exists and that the abandonment value of the project at the end of the first year is $45,000 after-tax. Calculate the new expected net present value of the project, assuming that the company would abandon the project if it is worthwhile to do so. (5pts) (4) What is the value of the managerial option? (2pts)

Answer rating: 100% (QA)

1 NPV of scenario 1 90000 60000 1008 2000010082 1729766 2 Expected NP... View the full answer