Question

VFIC Industries has come up with a new mountain bike prototype and is ready to go...

VFIC Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $100,000 and last for one year. The management team believes that there is a 30% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then VFIC will invest $2 million to build a plant immediately that will generate expected annual after-tax cash flows of $300,000 in perpetuity starting in year two. If the test marketing is not successful, VFIC can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $150,000 in perpetuity starting in year two. VFIC's cost of capital is 10%.

What is the NPV of the VFIC Mountain Bike Project?

A.

$90,909

B.

$172,727

C.

$455,000

D.

-$45,455

E.

None of the above

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
VFIC Industries has come up with a new mountain bike prototype and is ready to go...
VFIC Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will cost $100,000 and last for one year. The management team believes that there is a 30% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then VFIC will invest $2 million to...
Firm A has a value of $500 million and Firm B has a value of $300...
Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and Firm B has 800 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the new firm is 5%. If Firm A purchases Firm B for $330 million, how much do Firm B's shareholders gain from this merger? A. $30 million...
You are considering opening a new plant. The plant will cost $ 97.5 million up front...
You are considering opening a new plant. The plant will cost $ 97.5 million up front and will take one year to build. After that it is expected to produce profits of $ 28.1 million at the end of every year of production​ (starting two years from​ now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.9 %. Should you make the​ investment? Calculate the IRR and...
You are considering opening a new plant. The plant will cost $102.8 million up front and...
You are considering opening a new plant. The plant will cost $102.8 million up front and will take one year to build. After that it is expected to produce profits of $28.8 million at the end of every year of production​ (starting two years from​ now). The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.7%. Should you make the​ investment? Calculate the IRR and use it to...
You are considering opening a new plant. The plant will cost $ 97.9 million up front...
You are considering opening a new plant. The plant will cost $ 97.9 million up front and will take one year to build. After that it is expected to produce profits of $ 28.6 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2 %. Should you make the​ investment? Calculate the IRR and use it to determine the...
You are considering opening a new plant. The plant will cost $ 102.1 million up front...
You are considering opening a new plant. The plant will cost $ 102.1 million up front and will take one year to build. After that it is expected to produce profits of $ 30.5million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.3 % Should you make the​ investment? Calculate the IRR and use it to determine the maximum...
13-2 a. Project X has an up-front cost of $20 million. The project is expected to...
13-2 a. Project X has an up-front cost of $20 million. The project is expected to produce after-tax cash flows of $7.5 million at the end of each of the next 3 years (t = 1, 2, and 3). The project has a WACC=10%. What is the project’s NPV? b. However, if the company waits a year they will find out more about the project’s expected cash flows. If they wait a year, there is a 50% chance the market...
You are considering opening a new plant. The plant will cost $ 101.5 million up front...
You are considering opening a new plant. The plant will cost $ 101.5 million up front and will take one year to build. After that it is expected to produce profits of $ 29.9 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.1 %. Should you make the​ investment? Calculate the IRR and use it to determine the...
SLPC has decided to start a new project manufacturing gardening tools, an entirely new area for...
SLPC has decided to start a new project manufacturing gardening tools, an entirely new area for the company. The company is considering a 4 year project in which revenues will be £6M/year (constant for 4 years) and the capital investment requirement will be £3M (zero value after 4 years). This investment is depreciated on a straight line basis over 4 years and the company's tax rate is 30%. 1. Calculate the incremental free cash flows for the project 2. If...
Rump Industries is considering the purchase of a new production machine for $100,000. The introduction of...
Rump Industries is considering the purchase of a new production machine for $100,000. The introduction of the machine will result in an increase in earnings before interest and tax of $25,000 per year. Set-up of the machine will involve installation costs of $5,000 after-tax. Additionally, the machine will require workers to undergo training that will cost the company $5,000 after-tax. An initial increase in raw materials and inventory of $25,000 will also be required. The machine has an expected life...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT