Compute for projects npv and decide whether should take

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Versatile, an aircraft builder may design a new helicopter. First Versatile would need to invest $10,000 today for the design and model tank testing. The managers believe there is 60% chance that this phase will be successful. If stage 1 is not successful, salvage value is zero. For next stage, a prototype costing $500,000 after a year from initial investment should be built for testing. It is estimates to be sold at $100,000 is the testing failed with a 20% probability of failing. Once it passed the one-year test, it can proceed to Stage 3. Stage 3 would cost $1 million. If the economy is strong the net sales would be $3 million, otherwise if economy is weak sales would be $1.5 million. Both net sales occur 1 year after Stage 3 investment of $1 million, and each state of economy has 50% chance of occurring. Versatile's cost of capital is 12%.

Question 1: Compute for the projects NPV and decide whether you should take the project or not.

Reference no: EM132591596

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