Question

Your firm is considering designing a new computer/TV interface. If you design this product and demand is high, you believe the present value of cash flows will be $15 million. If demand is low, the present value of revenues will be only $3 million. The probability that demand will be high is 35%. The product will cost $7 million dollars to design. Which of the following best describes the NPV of the project.

Now McWeezy consulting has offered to figure out whether demand will be high or low next year. Assuming McWeezy will be correct in their assessment of demand, what is the most you would be willing to pay for their services (and still have NPV =0)?  Answer in millions.

Answer 1

Solution:

Net present worth = Discounted money inflow - Initial Cash venture ....... (1)

Beginning money venture = 7 million + x

where x is the most extreme sum that can be paid to Mcweezy counseling

Limited money inflow = 15 million x 35% + 3 million x 65% => 7.2 million

Comprehending utilizing (1)

0 = 7.2 million - (7 million + x)

x = 0.2 million

The most extreme that can be paid to the counseling firm for evaluating request is 0.2 million

Note:

1. The limited money inflows are increased with the likelihood rate to show up at a close to address income figures for the plausible interest.
2. The likelihood of interest being low is 65% i.e (100% - 35%)