Question

You are evaluating the following project. All $ are in millions Initial cost of the project at t-0 is $70. Annual cash flows

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Answer #1

Part 3 :

Let’s assume at t=1 we certainly know demand will be high.

WACC = 0.6*(2.07 + 2.1*6) + 0.4*(5*(1-0.4))

= 10.90%

We know that demand is high at t= 1, therefore annual cash flow is 45 starting t=2.

NPV = -70 + (0.3*45 + 0.4*30 + 0.3*15)/(1.109) + 45/(1.109^2) + 45/(1.109^3)

= 26.63

similarly, use the cases for when demand is known to be average and low at t=1.

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