22 Jul WHAT IS THE PROJECTS NET PRESENT VALUE?
Garner-Wagner is considering investing in a project that requires an investment o Show more a. Garner-Wagner is considering investing in a project that requires an investment of $3000000. The project will generate a cash inflow of 500000 per year for the next 5 years. The cost of capital is 10%. What is the projects net present value? b. If Garner-Wagner goes ahead with this project today it will obtain knowledge that will give rise to additional opportunities 5 years from now (at t = 5). The company can decide at t = 5 whether or not it wants to pursue these additional opportunities. Based on the best information available today there is a 35% probability that the outlook will be favorable in which case the future investment opportunity will have a net present value of $6 million at t = 5. There is a 65% probability that the outlook will be unfavorable in which case the future investment opportunity will have a net present value of -$6 million at t = 5. Garner-Wagner does not have to decide today whether it wants to pursue the additional opportunity. Instead it can wait to see what the outlook is. However the company cannot pursue the future opportunity unless it makes the $3 million investment today. What is the estimated net present value of the project after consideration of the potential future opportunity? Show less
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