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Garner-Wagner has a project that produces the following cash flows: CF 0 = 3,000,000; CF15 = 500,000; and has a discount rate of I/YR = 10. CF0 =...
Garner-Wagner has a project that produces the following cash flows: CF 0 = −3,000,000;
CF1−5 = 500,000; and has a discount rate of I/YR = 10. CF0 = −3,000,000; CF1−5 = 500,000;
I/YR = 10. 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?
$1,104,6
07
$875,203
$199,328
$561,947
$898,205
SolutionYear012345I/YRNPV Cash Flow-3,000,000500,000500,000500,000500,000500,00010%-1104606.62 If at t = 5 the firm’s technology is not successful, the firm will choose not to do...