Jennifer K. is analyzing a project and has determined that the
initial cost will be $1,519,000 and the required rate of return
needs to be 14 percent. The project has a 60 percent chance of
success and a 40 percent chance of failure. If the project fails,
it will generate an annual after-tax cash flow of $261,000. If the
project succeeds, the annual after-tax cash flow will be $684,000.
She has further determined that if the project fails, she will shut
it down after the first year and sell the equipment for the
after-tax salvage value of $530,000. If however, the project is a
success, she can expand it with no additional investment and
increase the after-tax cash flow to $712,000 a year for Years 2-5.
At the end of Year 5, the project would be terminated and have no
salvage value. What is the expected net present value of this
project at Time 0?
$210,419.21
$176,737.63
$235,844.96
$229,842.11
$185,006.33