Initial Outlay
Consider the following project data:
1. a $500 (Intial Outlay) feasibility study will be conducted at t=0
2. if the study indicates potential, the firm will spend $1000 at t=1 to buld a prototype. The best estimate now is that there is an 80% chance that the study will indicate potential, and a 20% chance that it will not.
3. if reaction to to the prototype is good, the firm will spend $10,000 to build a producstion plant at t=2. The best estimate now is that there is a 60% chance that the reaction to the prototype will be good and a 40% chance that it will be poor.
4. If the plant is built, there is a 50% chance of a t=3 cash inflow of $16,000 and a 50% chance of a $13,000 cash inflow.
If the appropriate cost of capital is 10%, what is the project's expected NPV?
the instructor told us that the answer should be less the $50
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