Singh Development Co. is deciding whether to proceed with Project X. The after-tax cost would...
50.1K
Verified Solution
Link Copied!
Question
Accounting
Singh Development Co. is deciding whether to proceed with Project X. The after-tax cost would be $8 million in Year 0 . There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $4 million per year during Years 1,2, and 3. However, there is a 50% chance that X would be less successful and would generate after-tax cash flows of only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an after-tax outlay of $10 million at the end of Year 2 . Project Y would then be sold to another company netting $20 million after taxes at the end of rear 3. Singh's WACC is 14%. a. If the company does not consider real options, what is Project X's expected NPV? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million b. What is X's expected NPV with the growth option? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55 . Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million c. What is the value of the growth option? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55 . Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Singh Development Co. is deciding whether to proceed with Project X. The after-tax cost would be $8 million in Year 0 . There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $4 million per year during Years 1,2, and 3. However, there is a 50% chance that X would be less successful and would generate after-tax cash flows of only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an after-tax outlay of $10 million at the end of Year 2 . Project Y would then be sold to another company netting $20 million after taxes at the end of rear 3. Singh's WACC is 14%. a. If the company does not consider real options, what is Project X's expected NPV? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million b. What is X's expected NPV with the growth option? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55 . Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million c. What is the value of the growth option? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55 . Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to three decimal places. $ million 