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Solved: Assigned Problem 2 Garner-Wagner Is Considering Investing In A Project That Requires $3,000,000. The Project Will Generate A Cash Inflow Of 500,000 Per Year For The Next 5 Years The Cost Of Ca

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Assigned Problem 2 Garner-Wagner is considering investing in a project that requires $3,000,000. The project will generate a


Assigned Problem 2 Garner-Wagner is considering investing in a project that requires $3,000,000. The project will generate a cash inflow of 500,000 per year for the next 5 years The cost of capital is 10%. What is the project's net present value? a. an investment of 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 positive 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 negative 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 futurd 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? b.

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Answer (a): NPV = Annual cash flow * PV factor of annuity for 5 years at 10% rate - Initial investment = 500000 * (1 - 1 / (1 + 10%)5) / 10% - 3000000 =-$1,104,

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