Suppose Project A’s A-T net cash flows depend critically upon customer acceptance of the product. There is a 60%probabil
Posted: Sun Apr 10, 2022 8:44 am
Suppose Project A’s A-T net cash flows depend critically upon
customer acceptance of the product. There is a 60%probability
that the product will be wildly successful and produce A-T net cash
flows of $200,000, and a 40% chance it will produce annual A-T cash
flow of
-$50,000. Company does not have the option to delay the
project but it may abandon the project after a year, if the
customer has not adopted the product. If the project is abandoned,
there will be no operating costs incurred nor cash inflows received
after the first year. So, shell it proceed with Project A or not?
Explain.
customer acceptance of the product. There is a 60%probability
that the product will be wildly successful and produce A-T net cash
flows of $200,000, and a 40% chance it will produce annual A-T cash
flow of
-$50,000. Company does not have the option to delay the
project but it may abandon the project after a year, if the
customer has not adopted the product. If the project is abandoned,
there will be no operating costs incurred nor cash inflows received
after the first year. So, shell it proceed with Project A or not?
Explain.