Consider a $1199 investment that will produce perpetual cash flows. If the demand turns out to be high, the expected cash flows will be $151 per year. Otherwise, the expected cash flows will be $22 per year. The intial probabilities for high vs. low demand are 50%/50%. Before the investment is made, an initial market test, costing $105, can reveal with certainty whether the demand is high or low.The cost of capital is 9%. Assume that $105 for market test would have to be spent now and $1199 would be invested at the end of year

What is the NPV now if the firm does the marketing test and makes the investment decision conditional on its outcome?

Answer rating: 100% (QA)

Step 12 The expected cash flows if demand turns out to be higher 151 per year The expected cash flow... View the full answer