Question

THE FOLLOWING INFORMATION IS COMMON TO PROBLEMS 2 ANO COMMON TO PROBLEMS 3 AND 4 3- The Z-90 project being considered by Steppingstone Inc. (SI) has an up- front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, Z-45, becomes an industry standard. There is a 50% chance that the Z-45 will become the industry standard, in which case the Z-90's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the Z- 45 will not become the industry standard, in which case the Z-90's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%. yeaS. Based on the above information, what is the Z-90's expected net present value? value? 4- Now assume that one year from now SI will know if the Z-45 has become the industry standard. Also assume that after receiving the cash flows att = 1, SI has the option to abandon the project, in which case it will receive an additional $100,000 at t= 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option?

Answer 1