CT Corp. is considering a project that has an up-front cost at t = 0 of P24,000. The project’s subsequent cash flows are critically dependent on whether a competitor’s product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, Mano's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact Mano. There is a 75% chance that the competitive product will be rejected, in which case Mano's expected cash flows will be P8,000 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor’s product will be approved, in which case the expected cash flows will be only P600 at the end of each of the next seven years (t = 1 to 7). Mano will know for sure one year from today whether the competitor’s product has been approved. CT Corp. is considering whether to make the investment today or to wait a year to find out about the FDA’s decision. If it waits a year, the project’s up-front cost at t = 1 will remain at P24,000, the subsequent cash flows will be lower at P7,500 per year if the competitor’s product is rejected and P600 per year if the alternative product is approved. However, if Mano decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7). In addition, once Mano knows the outcome of the FDA's decision, it will not take on the project if its NPV is negative. This is a risky project, so a WACC of 16.0% is to be used. Listed below are the requirements for this data set: If CT chooses to invest now, what is the expected NPV of the project? (Round final answer to the nearest peso. If the resulting net NPV is less than zero, denote a negative amount as final answer) If CT chooses to wait a year before proceeding, what is the expected NPV of the project? (Round final answer to the nearest peso) What would CT do given the computed expected NPV for each alternative?
CT Corp. is considering a project that has an up-front cost at t = 0 of P24,000. The project’s subsequent cash flows are critically dependent on whether a competitor’s product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, Mano's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact Mano. There is a 75% chance that the competitive product will be rejected, in which case Mano's expected cash flows will be P8,000 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor’s product will be approved, in which case the expected cash flows will be only P600 at the end of each of the next seven years (t = 1 to 7). Mano will know for sure one year from today whether the competitor’s product has been approved.
CT Corp. is considering whether to make the investment today or to wait a year to find out about the FDA’s decision. If it waits a year, the project’s up-front cost at t = 1 will remain at P24,000, the subsequent cash flows will be lower at P7,500 per year if the competitor’s product is rejected and P600 per year if the alternative product is approved. However, if Mano decides to wait, the subsequent cash flows will be received only for six years (t = 2 ... 7). In addition, once Mano knows the outcome of the FDA's decision, it will not take on the project if its
This is a risky project, so a WACC of 16.0% is to be used.
Listed below are the requirements for this data set:
- If CT chooses to invest now, what is the expected NPV of the project? (Round final answer to the nearest peso. If the resulting net NPV is less than zero, denote a negative amount as final answer)
- If CT chooses to wait a year before proceeding, what is the expected NPV of the project? (Round final answer to the nearest peso)
- What would CT do given the computed expected NPV for each alternative?
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