Liquid Energy Inc. has developed a new energy drink, called Liquifire. The company isconsidering spending $10 million to build a manufacturing facility to produce Liquifire.As your firm's financial analyst, you estimate that there is a 30% probability of highdemand for Liquifire, in which case the firm will receive $4 million at time 1, and willhave an option to expand the production at the cost of $20 million at time 1. If thefirm undertakes the expansion at time 1, the present value at time 2 of all the followingcash flows from this decision will be $35 million. If it chooses not to invest at time 1,the present value at time 2 of all the following cash flows from this decision will be$12 million. You also estimate that there is a 70% probability of low demand, with acash flow in time 1 of $2 million. The company would discontinue producing Liquifireand sell the manufacturing facility at time 1. However, the price that the firm can getfor these assets is uncertain. There is a 40% probability that it will receive $8 million,and a 60% probability that it will receive $5 million. If the discount rate is 9%, whatis the NPV of the Liquifire project?

Answer rating: 100% (QA)

To calculate the net present value NPV of the Liquifire project we need to discount the expected cas... View the full answer