QUT Corporation can invest $5 million in a new production plant. After construction of the plant, the price and the incremental increase in quantity sold will be either $2.5 and 6 Million in case of a boom, or $1.5 and 3 Million in case of a bust. There is a 40% probability of boom and 60% probability of bust. The plant has an expected life of 5 years. Incremental fixed costs are $2 million a year, and variable costs are $1 per quantity sold. The plant will be depreciated under the prime cost method, and a salvage value is $1 million. The opportunity cost of capital is 12% and tax rate (T) is 40%. What is the project’s NPV under the baseline assumptions? Show all work to receive marks. No marks will be given for answers without justification.

Answer rating: 100% (QA)

NPV 247791299 2477913 Stepbystep explanation Cashflow Probabi... View the full answer