Bio-Egen Inc. is a technology firm working on a new technology for producing electricity. The new...

 

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Bio-Egen Inc. is a technology firm working on a new technology for producing electricity. The new technology involves two stages of investment. The first stage, which starts at time 0 and takes one year to complete, requires an investment of $30 million and has a probability of success of 16%. The second stage starts at time 1 and takes one year to complete. If the first stage is successful, the second stage has a probability of success of 80%. Otherwise, the second stage has a probability of success of only 9%. In both cases, the second stage requires an investment of $90 million. If successful, this technology will produce a perpetual risky stream of cash flows of $50 million per year, starting in year 2. Assume that the project's risk is completely idiosyncratic, and thus the appropriate discount rate for all cash flows is the risk-free rate, which is 10% per year. (a) What is the NPV of the investment if the company must commit to both stages of investment? -32.91 million dollars X (b) Suppose the firm is able to shut down the development process after the first stage. What is the NPV of the investment in this case? 9.85 million dollars X Please round your answers to at least two digits. e.g., if the answer is 19/17, submit 1.12. 1.1 will be marked as incorrect! 1.1176 will be accepted. Make sure you provide the type of answer required. Pay special attention to units specified in the trailing text after the blanks. (e.g., %) When submitting your answer, make sure you do not leave empty blanks. Do not use % and $ signs. Bio-Egen Inc. is a technology firm working on a new technology for producing electricity. The new technology involves two stages of investment. The first stage, which starts at time 0 and takes one year to complete, requires an investment of $30 million and has a probability of success of 16%. The second stage starts at time 1 and takes one year to complete. If the first stage is successful, the second stage has a probability of success of 80%. Otherwise, the second stage has a probability of success of only 9%. In both cases, the second stage requires an investment of $90 million. If successful, this technology will produce a perpetual risky stream of cash flows of $50 million per year, starting in year 2. Assume that the project's risk is completely idiosyncratic, and thus the appropriate discount rate for all cash flows is the risk-free rate, which is 10% per year. (a) What is the NPV of the investment if the company must commit to both stages of investment? -32.91 million dollars X (b) Suppose the firm is able to shut down the development process after the first stage. What is the NPV of the investment in this case? 9.85 million dollars X Please round your answers to at least two digits. e.g., if the answer is 19/17, submit 1.12. 1.1 will be marked as incorrect! 1.1176 will be accepted. Make sure you provide the type of answer required. Pay special attention to units specified in the trailing text after the blanks. (e.g., %) When submitting your answer, make sure you do not leave empty blanks. Do not use % and $ signs.

Answer rating: 100% (QA)

To calculate the NPV of the investment we need to discount all the cash flows back to their present ... View the full answer